3333 re: Fresh Sears Annual Report · re: Fresh Sears Annual Report 2002 ... End online and catalog business is a growth business and, with sears.com, we have great potential as a

Sears Annual Report 2002

re: FreshSears, Roebuck and Co. 3333 Beverly Road Hoffman Estates, Illinois 60179 www.sears.com

Sears An

nual R

eport 2002

Company Information

Headquarters

Sears, Roebuck and Co.

3333 Beverly Road

Hoffman Estates, Ill. 60179

847.286.2500

Annual Meeting

The Annual Meeting of

Shareholders of Sears,

Roebuck and Co. will be

held at the company’s

headquarters at

3333 Beverly Road,

Hoffman Estates, Ill.

on May 8, 2003

at 10:00 a.m.

Sears Online

This annual report and

other financial information

can be found online at:

www.sears.com

Investor Information

Financial analysts and

investment professionals

should direct inquiries to:

Investor Relations

847.286.7385.

Sears Direct Purchase

Stock Plan Information

Prospective shareholders,

and shareholders whose

shares are held by a broker

or bank, should call

1.888.SEARS88

(1.888.732.7788)

or visit sears.com.

Customer Relations

1.800.549.4505

Financial/Shareholder

Information

You may call Sears toll-free at

1.800.SEARS80

(1.800.732.7780)

or visit sears.com

or write our registrar:


c/o EquiServe Trust

Company, N.A.

P.O. Box 43069

Providence, RI 02940-3069

for any of the following:

˜ Most recent stock price

information

˜ Copies of the company’s

financial reports

˜ Transfer agent/shareholder

records

˜ Individual stock records

˜ Investment plan accounts

˜ Dividend checks

˜ Stock certificates

EquiServe web site:

www.equiserve.com

E-mail address:

[email protected]

TDD for hearing impaired:

1.800.952.9245

Please use the following address

for items sent by courier:

EquiServe Trust Company, N.A.

150 Royall Street

Canton, MA 02021

For items delivered in person:

STARS, Inc.

100 William Street, Galleria

New York, NY 10038

The following trademarks and

service marks appearing in the 2002

annual report are the property of

Sears, Roebuck and Co.:

A&E Factory ServiceTM,

Apostrophe®, Canyon River Blues®,

CovingtonTM, Craftsman®, DieHard®,

Kenmore®, Lands’ End®, NTB®,

OSH Orchard Supply Hardware®,

Satisfaction Guaranteed or Your

Money BackSM, Sears®, Sears

American Dream CampaignSM,

Sears: Where Else?SM, TKS Basics®,

The Great Indoors®, Wish Book®

© 2003 Sears, Roebuck and Co.

Printed on recycled paper

Sears is financially strong.

We have a century-long reputation for trust

and quality. We serve 48 million American households

every year. We are committed to improving our

merchandise, enhancing our customer relationships,

making the shopping experience easier and

growing our profits. We’re on the way to

building a fresh new Sears.

Sears is a healthy company with strong cash flow

and a solid balance sheet. Profits grew in 2002, as we

better managed margin, expenses and inventory.

˜ Record comparable earnings

per share, up 17 percent*

˜ Record comparable net income,

$1.6 billion*

˜ 25% return on equity*

achieved in 2002

˜ Lands’ End acquisition revitalizing

our apparel offering and adding

growth opportunities

˜ Launched Covington–new, classic,

casual-apparel brand

˜ Inventory, promotion and sourcing

initiatives improved gross margin

25

26

27

28

29%

5

10

15

20

25%

1

2

3

4

$5

re: Vitalize

Gross Margin RateEarnings Per Share*

*Excludes noncomparable items. See page 16 of the attached

Form 10-K for a description of noncomparable items.

Return On Equity*

99 00 01 0299 00 01 02 99 00 01 02

A year ago, I wrote that 2002 would be a very important

transition year for Sears. Our focus was to fundamen-

tally reposition and restructure our core business, the

Full-line stores. Thousands of Sears associates and

managers committed to executing the key initiatives

that supported this strategy. Their efforts were

successful, and we left 2002 a much different and

stronger business.

We also wanted to build on the great heritage, great

brands and strong resources that are so much a part

of Sears. We succeeded here as well. We introduced

innovative new products from Kenmore and Craftsman.

We improved customer satisfaction levels in Product

Repair Services. We launched our new, casual-apparel

brand for men, women and kids, called Covington.

And, in an opportunity that comes along once in a

lifetime, we acquired highly regarded Lands’ End,

America’s largest direct apparel merchant.

We also earned a record profit in an uncooperative

economy, thanks to operational discipline and our

restructuring activities. It was a year of substantial

change for the Sears you know, a home-and-family-

focused broadline retailer with outstanding credit and

service capabilities.

Yet, with our many successes in 2002 and real progress

against our goals, I was disappointed that our share

price fell sharply in the fourth quarter. The decline

coincided with disappointment in our credit business,

sagging consumer confidence and soft sales relative

to our competition. We are working diligently to restore

our share price to an appropriate value.

Record earnings

On a reported basis, net income was up 87 percent

from last year. Sears reported record comparable

earnings per share in 2002 of $4.92, an increase of 17

percent over comparable EPS for the previous year.

Comparable net income was also a record at $1.6

billion, and the company generated nearly $1 billion

in free cash flow from operations.* Total revenues were

$41.4 billion.

These results included strong profit growth in our core

retail and related services segment, which improved

28 percent on a comparable basis. Comparable store

sales were lower, reflecting the difficult economy, store

disruption during much of the year and the exiting of

unprofitable promotional activities and lines of business.

Our credit and financial products segment remains

highly profitable and earned more than $1.5 billion for

the third consecutive year on a comparable basis. Credit

had a disappointing second half, however, because the

economy negatively impacted consumer credit quality

and because of unanticipated problems that developed

in our Sears Gold MasterCard portfolio. We have taken

aggressive actions to address those problems.

Sears Canada enjoyed a turnaround year as it com-

pleted the conversion of the remaining Eatons stores

to the Sears format.

March 12, 2003

to: Sears Shareholder

fr: Alan Lacy

re: Fresh


*See page 16 of the attached Form 10-K for a

description of noncomparable items.

re: Store

With the execution of multiple Full-line

store initiatives, 2002 was a year of significant change.

Nearly every aspect of our stores, from

merchandising to check-out, underwent change to create

an easier-to-shop, easier-to-operate store.

˜ More focused, relevant

merchandise assortments

˜ More convenient and appealing

shopping environment

˜ A streamlined field organization

˜ More clearly defined roles and

responsibilities for store associates

˜ More efficient supply chain processes

˜ Significantly improved cost structure

200

400

600

800

1000

$1200

Operating income (in millions)

from retail and related services on

a comparable basis

See page 17 of the attached Form 10-K for additional segment results.

2001 2002

28%

increase

The sale of our shares in Advance Auto Parts netted a

noncomparable gain of $0.74 per share, or $445 million

in after-tax proceeds. During the year, we repurchased

more than $400 million of our shares. We consider our

shares undervalued and will continue to repurchase

shares with our excess cash flow. More than $4 billion

has been returned to shareholders over the past four

years through dividends and share buybacks.

Overall, we are pleased with our 2002 operational

progress, despite our many challenges. Sears ended

the year a very profitable company with a solid

balance sheet.

However, our work continues in 2003. There is much

left to do.

Repositioning and restructuring

Our focus in 2002 was to reposition and restructure the

Full-line stores. We knew there would be executional

risk, particularly transitional revenue loss. But, in

less than 12 months, we significantly improved our

operations. We reorganized our field and support

groups and, in the process, altered the activities and

accountabilities of virtually every store associate.

We refined the way our goods reach the store, the look

of the interior and the way merchandise is presented.

We also changed much of the merchandise itself,

adding Covington and Lands’ End and eliminating

under-performing businesses and brands in order

to provide space for merchandise categories we can

grow profitably. These efforts also enhanced our

customer shopping experience. And, not only have

these initiatives improved customer satisfaction, they

also have significantly lowered our cost structure.

Lands’ End has been an energizing addition to our

company. Not only is Lands’ End a great brand with a

stature comparable to Kenmore, Craftsman and

DieHard, it’s also a highly profitable, well-run business

with an engaging, customer-driven culture. Because

of Lands’ End, Sears is now the No. 1 online apparel

merchant in the United States. Also, sears.com had

another strong year, significantly increasing its sales and

increasing store sales through product research and

online purchasing with in-store merchandise pick-up.

Our multi-channel sales strategy, coupled with national

delivery and service capabilities, provides us with

significant growth opportunities.

During 2002, I continued to refine the company’s

organizational structure and to strengthen our senior

team with executives who are well qualified–strategically

and operationally.

2003 priorities

When we build a new store, we first pour the foundation.

The work is unglamorous and takes time. But only

when the groundwork is laid can we take the next

steps. In 2002, we poured the foundation of a new

Sears. In 2003, we are taking the next steps with

focused and systematic efforts in five key areas:

˜ Increasing sales. Our disruptions are getting behind us.

We are becoming more customer driven and improving

what and how we sell. Expect new marketing activities

to better differentiate Sears and to drive sales.

˜ Continuing to fix Full-line stores. We must continue

to strengthen the foundation and improve upon our

new ways of doing business.

˜ Growing our customer direct capabilities. The Lands’

End online and catalog business is a growth business

and, with sears.com, we have great potential as a

multi-channel retailer.


re: Solve

Whether it’s responding to the diverse needs

of multicultural customers, supporting inclusiveness

in the workplace or helping people establish themselves

in the communities we serve, Sears is growing

with America’s diverse cultures.

˜ The $100 million Sears American

Dream Campaign will help millions

of Americans overcome barriers to

purchasing homes.

˜ Sears multicultural store base has

grown more than 45 percent in the

last six years.

˜ Sears managers are trained on the

importance of diversity in today’s

business environment.

˜ Sears leadership is committed to

diversity as a strategic priority.

The Sears trade area, a five-mile radius of all Sears stores,

averages a higher percent of ethnic representation than the U.S. population.

Demographic Landscape

African-American

Asian

Hispanic

U.S.: 4.2%

Sears: 6.4%

U.S.: 12.7%

Sears: 14.9%

U.S.: 13%

Sears: 18.2%

˜ Growing what is working in credit and fixing what

is not. We will improve the performance of Sears Gold

MasterCard and focus on continuing to make the Sears

proprietary card a customer-relevant product.

˜ Improving productivity. Our goal is to increase earn-

ings per share by 50 percent over the three years ending

in 2004. To do so in a tough economy demands greater

revenue growth coupled with further improvement in

our cost structure.

Of course, every year has its challenges. In 2003, we are

taking the next major steps in building a new Sears.

These efforts are customer driven. We continue to

better understand the customer’s perspectives and

needs, and place them at the core of our activities. The

customer is the reason we are in business.

Board retirement

Warren L. Batts, retired chairman and CEO of

Tupperware Corp. and retired chairman of Premark

International, retired from Sears’ board of directors

at the 2002 annual meeting. Warren provided out-

standing leadership during his 16 years with the board

and chaired many committees. We thank him for his

many contributions.

Diversity and community relations

I firmly believe that for Sears to be successful, every

level of our organization must represent the diversity

of America and our customer base. Although the diver-

sity of our organization overall compares very well

with the country, our leadership is not as diverse as it

needs to be. Hiring, developing and promoting minorities

and women to leadership positions is a key priority

for each member of our senior management team.

I am very proud of the efforts Sears is making to focus

its community outreach programs and to help millions

of Americans overcome barriers to purchasing homes.

In 2002, we launched the Sears American Dream

Campaign, a multi-year, $100 million commitment to

provide products and services to help disadvantaged

families acquire, outfit and maintain their homes. The

program will hit full stride in 2003.

Associates are key

Sears’ success is the direct result of the quality of our

people and the work they do each day to improve how

we satisfy our customers. I want to thank our associates

for their hard work and dedication to creating the

foundation for a new Sears and their eagerness to push

ahead and continue to improve.

I am very confident in the future of this great company.

Alan J. Lacy

Chairman and Chief Executive Officer

March 12, 2003


Alan J. Lacy

Chairman of the Board,

President and

Chief Executive Officer

Janine M. Bousquette

Executive Vice President

and Chief Customer and

Marketing Officer

Kathryn Bufano


and General Manager

Softlines

Mary E. Conway


and General Manager

Full-line Store Operations

Steven M. Cook

Vice President

Deputy General Counsel

and Acting General

Counsel

Mark S. Cosby


President

Full-line Stores

David F. Dyer

President and


Lands’ End and


and General Manager

Customer Direct

Mark C. Good


and General Manager

Product Repair Services

Lyle G. Heidemann


and General Manager

Hardlines

Gerald F. Kelly

Senior Vice President and

Chief Information Officer

Sara A. LaPorta

Senior Vice President

Strategy

Greg A. Lee


Human Resources

Paul J. Liska


and President

Credit and Financial

Products

William G. Pagonis


Supply Chain Management

Glenn R. Richter

Senior Vice President and

Chief Financial Officer

Sears Canada:

Mark A. Cohen

Chairman of the Board and


Hall Adams, Jr.

Retired Chairman

of the Board and


Leo Burnett Company, Inc.

Brenda C. Barnes

Former President and


Pepsi-Cola North America

James R. Cantalupo



McDonald’s Corporation

Donald J. Carty



AMR Corporation and

American Airlines, Inc.

W. James Farrell



Illinois Tool Works, Inc.

Alan J. Lacy

Chairman of the Board,

President and



Michael A. Miles

Retired Chairman

of the Board and Chief

Executive Officer

Philip Morris

Companies, Inc.

Hugh B. Price

President and


National Urban League

Dorothy A. Terrell

Venture Partner

First Light Capital

Raul H. Yzaguirre

President and


National Council

of LaRaza

Executive Officers Board of Directors

Sears At A Glance

People

˜ Approximately 241,000

associates in the U.S. and

48,000 in Canada.

˜ Nearly one million hours of

community volunteer service

provided by associates and

retirees each year.

˜ Nearly $50 million in

monetary and merchandise

contributions by Sears and its

associates to not-for-profit

organizations in 2002.

˜ Listed as one of the top 30

companies for executive

women in 2002 by the

National Association of

Female Executives.

˜ Listed in Latina Style

magazine’s top 50 companies

for Latinas in 2002.

Products

˜ No. 1 retailer of home

appliances, lawn mowers

and fitness equipment.

˜ Craftsman is ranked No. 1

brand in America by men for

overall quality.

˜ Kenmore is the No. 1

selling appliance brand in

the U.S., where one in every

two homeowners owns a

Kenmore appliance.

˜ Lands’ End is the largest

specialty apparel catalog

company in the U.S. and the

No. 1 seller of apparel online.

˜ DieHard is America’s

most preferred

automotive battery.

Service

˜ Approximately 870 Full-line

stores and more than 1,300

specialty stores.

˜ More than 48 million active

Sears customer households.

˜ One of America’s largest

credit card businesses.

˜ Largest product repair service

provider, with 14.5 million

service calls made annually.

˜ More than 450 million

customer checkouts in 2002.

˜ More than 5 million product

deliveries to homes annually.

˜ A promise of “Satisfaction

Guaranteed or Your

Money Back” for more

than a century.

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KFor Annual and Transition Reports pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the fiscal year ended December 28, 2002

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

Commission file number 1-416

SEARS, ROEBUCK AND CO.(Exact Name of Registrant as Specified in Its Charter)

New York(State of Incorporation)

36-1750680(I.R.S. Employer Identification No.)

3333 Beverly Road, Hoffman Estates, Illinois(Address of principal executive offices)

60179(Zip Code)

Registrant's telephone number, including area code: (847) 286-2500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of Each Exchange on Which Registered

Common Shares, par value $0.75 per shareNew York Stock ExchangeChicago Stock ExchangePacific Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

On January 31, 2003, the Registrant had 316,815,592 common shares outstanding. The aggregate market value (based on the closingprice of the Registrant's common share as reported in a summary of composite transactions in The Wall Street Journal for stockslisted on the New York Stock Exchange on June 28, 2002) of the Registrant's common shares owned by non-affiliates (which areassumed to be shareholders other than (i) directors and executive officers of the Registrant and (ii) any person known by theRegistrant to beneficially own five percent or more of Registrant's common shares), as of June 28, 2002 was approximately $13.2billion.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will notbe contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference inPart III of this Form 10-K or any amendment to this Form 10-K. [ ]

Documents Incorporated By ReferencePart III of this Form 10-K incorporates by reference certain information from the Registrant's proxy statement relating to its AnnualMeeting of Shareholders to be held on May 8, 2003 (the "2003 Proxy Statement").

2

PART I

Item 1. Business

Sears, Roebuck and Co. ("Sears", and together with its consolidated subsidiaries, the "Company") originated from anenterprise established in 1886 and incorporated under the laws of New York in 1906. Its principal executive officesare located at 3333 Beverly Road, Hoffman Estates, Illinois. The Company is a multi-line retailer that offers a widearray of merchandise and related services. In addition, through its Credit and Financial Products businesses, theCompany offers its customers various credit, financial and related insurance products. The Company is organized intofour principal business segments – Retail and Related Services, Credit and Financial Products, Corporate and Other,and Sears Canada. The Company is among the largest retailers of merchandise in North America.

In June 2002, the Company acquired Lands' End, Inc. ("Lands' End"). Headquartered in Dodgeville, Wisconsin,Lands' End is a leading direct merchant of traditionally-styled casual clothing for men, women and children,accessories, footwear, home products and soft luggage.

The Company's Annual Reports on Form 10-K, including this Form 10-K, as well as the Company's Quarterly Reportson Form 10-Q, Current Reports on Form 8-K and any amendments to such reports are available, free of charge, on theCompany's internet website, sears.com. These reports are available as soon as reasonably practicable after suchmaterial is electronically filed with or furnished to the Securities and Exchange Commission. The reference to theCompany's website address does not constitute incorporation by reference of the information contained on the website,and the information contained on the website is not part of this document.

The Company's business segments are defined as follows:

Retail and Related Services - consisting of:

Full-line Stores - 872 Full-line Stores, averaging approximately 90,000 net selling square feet, located primarily inshopping malls across the nation and offering:

� Hardlines - A full assortment of appliances, electronics and home improvement products, including tools,fitness and lawn and garden equipment; products range from major national brands to exclusive Searsbrands such as Kenmore, Craftsman and WeatherBeater.

� Softlines - A complete selection of fashionable, quality apparel and accessories for the whole family, finejewelry and home fashions at value prices; includes leading national brands as well as exclusive Searsbrands such as Lands' End, Covington, Canyon River Blues, Apostrophe and TKS Basics.

� Sears Auto Centers - Offer major national brands of tires, Sears exclusive DieHard brand and other brandsof batteries and related automotive services.

� sears.com - Sears online presence; offers a limited assortment of hardlines and softlines merchandise andprovides customers the option of buying online and picking up their merchandise in Full-line Stores.

Specialty Stores - Approximately 1,300 Specialty Stores, located primarily in free-standing, off-the-mall locationsor high-traffic neighborhood shopping centers.

� Dealer Stores - 767 primarily independently-owned stores, predominately located in smaller communitiesand averaging 5,300 net selling square feet, that offer appliances, electronics, lawn and garden merchandise,hardware and automobile batteries. Dealer Stores carry exclusive Sears brands such as Craftsman,Kenmore and DieHard as well as a wide assortment of national brands.

3

� Hardware Stores - 249 neighborhood Hardware Stores under the Sears Hardware and Orchard SupplyHardware brands, ranging, on average, from 21,000 to 41,000 net selling square feet, that carry Craftsmantools and lawn and garden equipment, a wide assortment of national brands and other home improvementproducts.

� National Tire & Battery (NTB) - 225 stores that offer major national brands of tires, DieHard and otherbrands of batteries and related services.

� The Great Indoors - 20 stores specializing in home decorating and remodeling, averaging approximately100,000 net selling square feet, dedicated to the four main rooms of the house: kitchen, bedroom, bathroomand great room.

� Commercial Sales - Primarily targets home builders, remodelers and property managers for appliancepurchases as well as vocational schools, factory maintenance and service companies for industrial toolpurchases.

� Sears Outlet Stores - 38 stores averaging 28,000 net selling square feet that offer appliances, electronicsand lawn and garden merchandise at a discount.

Direct to Customer - The Direct to Customer business includes Lands' End online and catalog operations aswell as results of operations for Lands' End's 15 retail stores effective June 17, 2002. These stores, averaging7,000 net selling square feet, offer traditionally-styled casual clothing for men, women and children primarilyfrom overstock catalog and online offerings. Direct to Customer also includes direct marketing of goods andservices memberships, merchandise through specialty catalogs and impulse and continuity merchandise.

Product Repair Services - Product repair, service contract protection and installation services are provided forall major brands of home products through a national network of approximately 10,000 service technicians. This business also sells and services residential cooling and heating systems.

Credit and Financial Products

This segment manages the Company's domestic portfolio of credit card receivables. The domestic credit cardreceivables portfolio consists primarily of the proprietary Sears Card and Sears ChargePlus (collectively, "SearsCard") and Sears Gold MasterCard and The Great Indoors Gold MasterCard (collectively, "MasterCard") accountbalances. Sears Card receivables are generated primarily from purchases of merchandise and services from theCompany's domestic operations. The MasterCard products are widely accepted by merchants outside the Company. The MasterCard credit card receivables are generated from purchases from the Company and other merchants, balancetransfers, convenience checks and cash advances. This segment also sells related financial products such as creditprotection and insurance products.

Sears National Bank (the "Bank"), a wholly-owned subsidiary of Sears based in Arizona, is a limited purpose creditcard bank engaging in credit card operations, originating credit accounts in all 50 states. The Bank is subject to certainrestrictions under federal law applicable to credit card banks as well as to Arizona credit card lending guidelines.

4

Corporate and Other

Corporate and Other operations include activities that are of an overall holding company nature, primarily consistingof administrative activities, the costs of which are not allocated to the Company's businesses. This segment alsoincludes home improvement services (primarily siding and windows through Sears Home Improvement Services) andSears Termite and Pest Control which are not related to the Company's retail operations. During 2001, the Companysold the Sears Termite and Pest Control business.

Sears Canada

The Company conducts similar retail, credit and corporate operations in Canada through Sears Canada Inc. ("SearsCanada"), a consolidated, 54.4% owned subsidiary of Sears. Sears Canada retail operations are conducted through123 department stores, 42 furniture and appliance stores, 141 dealer stores, 15 outlet stores, 52 automotive centers,approximately 2,200 catalog pick-up locations, 110 travel offices and online through sears.ca.

Information regarding revenues, operating income, total assets and capital expenditures of the Company's businesssegments for each of the three fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000is contained in Note 16 of the Notes to Consolidated Financial Statements. Information on the components ofrevenues is included in "Management's Discussion and Analysis".

Seasonality

Due to holiday buying patterns, merchandise sales traditionally are higher in the fourth quarter than in the otherquarterly periods, and the Company typically earns a disproportionate share of operating income in the fourth quarter.

Trademarks and Tradenames

The trade name "SEARS" is used by the Company. The name is the subject of numerous United States and foreigntrademark registrations. This trademark is material to the Company's domestic operations and other related businesses.

Sears sells private label merchandise under a number of brand names which are important to its domestic operations. The Company's LANDS' END®, KENMORE®, CRAFTSMAN® and DIEHARD® brands are among the mostrecognized private label brands in retailing. These names are the subject of numerous United States and foreigntrademark registrations. Other important and well-recognized Company trademarks and service marks include THEGREAT INDOORS®, NTB®, OSH ORCHARD SUPPLY HARDWARE®, CANYON RIVER BLUES®,APOSTROPHE®, TKS BASICS®, COVINGTONTM , A&E FACTORY SERVICETM and SEARS. WHEREELSE?SM. The Company's right to use all of its trade names continues so long as it uses the names.

Competition

The domestic retail and credit businesses are highly competitive. The principal factors that differentiate retailcompetitors include convenience of shopping facilities, quality of merchandise, competitive prices, brand names andavailability of ancillary services such as credit, product delivery, repair and installation. The principal competitivefactors that affect the Company's credit business are new product offerings, interest rates and credit and paymentterms. The Company believes its business model enables it to compete effectively despite strong competitivepressures in recent years.

Employees

The Company employs approximately 241,000 people in the United States and Puerto Rico, and 48,000 people inCanada, including part-time employees.

5

Item 1A. Executive Officers of the Registrant

The following table sets forth the names of the executive officers of the Company, their current positions and officeswith the Company, the date they first became officers of the Company and their current ages:

Name Position

Date FirstBecameOfficer Age

Alan J. Lacy Chairman of the Board of Directors, President and ChiefExecutive Officer

1994 49

Janine M. Bousquette Executive Vice President, Chief Customer andMarketing Officer

2002 42

Kathryn Bufano Executive Vice President/General Manager, Softlines - Sears Retail

2002 50

Mary E. Conway Executive Vice President/General Manager, Full-lineStore Operations - Sears Retail

1998 54

Steven M. Cook Vice President - Deputy General Counsel and ActingGeneral Counsel

2003 44

Mark S. Cosby Executive Vice President, Sears, Roebuck and Co. andPresident, Full-line Stores - Sears Retail

2002 44

David F. Dyer President and CEO - Lands' End and Executive VicePresident/General Manager Customer Direct, Sears,Roebuck and Co.

2002 53

Mark C. Good Executive Vice President/General Manager, ProductRepair Services

2002 46

Lyle G. Heidemann Executive Vice President/General Manager, Hardlines -Sears Retail

1992 58

Gerald F. Kelly Senior Vice President and Chief Information Officer 2002 55

Sara A. LaPorta Senior Vice President, Strategy 2002 42

Greg A. Lee Senior Vice President, Human Resources 2001 53

Paul J. Liska Executive Vice President and President, Credit andFinancial Products

2001 47

William G. Pagonis Senior Vice President, Supply Chain Management 1993 61

Glenn R. Richter Senior Vice President and Chief Financial Officer 2000 41

6

Messrs. Lacy, Heidemann and Pagonis and Ms. Conway have held the positions set forth in the above tables for atleast the last five years or have served the Company in various executive or administrative capacities for at leastthat length of time. The remaining executive officers have held the following positions for such five-year period:

Ms. Bousquette joined Sears as Executive Vice President, Chief Customer and Marketing Officer, in October2002. Prior to joining Sears, she was Chief Marketing Officer and Executive Vice President of eToys Inc., aWeb-based retailer, from 1999 to 2001. From 1995 to 1999, she was Vice President, Marketing with Pepsi-ColaDivision of PepsiCo, Inc., a snack and beverage manufacturer and distributor, serving as Vice President ofMarketing for Trademark Pepsi Brands from 1997 to 1999.

Ms. Bufano joined Sears as Executive Vice President, Softlines in January 2002. Prior to joining Sears, she wasPresident and Chief Merchandising Officer of The Dress Barn, Inc., a women's apparel retailer, since 2001. Priorto joining The Dress Barn, Inc., she was Executive Vice President, Women's Apparel of Macy's East, a departmentstore chain, since 1995.

Mr. Cook joined Sears in 1996 and was named Vice President and Deputy General Counsel - Transactions andSecurities in 1999. He became Vice President - Deputy General Counsel and Acting General Counsel in January2003. Prior to joining Sears, Mr. Cook practiced law at Skadden, Arps, Slate, Meagher & Flom (Illinois) andAffiliates from 1985 to 1996.

Mr. Cosby joined Sears as Executive Vice President, Sears, Roebuck and Co. and President, Full-line Stores inNovember 2002. Prior to joining Sears, he was Chief Operating Officer, KFC of TRICON Global Restaurants,Inc. (now Yum! Brands, Inc.), a restaurant operating company, from 2001 to November 2002 and ChiefDevelopment Officer from 1997 to 2001.

Mr. Dyer joined Sears as President and Chief Executive Officer, Lands' End and Executive Vice President andGeneral Manager, Customer Direct, Sears, in June 2002 following the acquisition of Lands' End. In December 2002,he also became responsible for the activities of The Great Indoors. Prior to the acquisition, he served as President andChief Executive Officer of Lands' End since 1998. Mr. Dyer was an independent catalog/retail consultant for theTexas Pacific Group, an investment firm, and the J. Crew Group, a clothing retailer, from 1997-1998.

Mr. Good joined Sears in 1997. He was appointed Executive Vice President/General Manager, Product RepairServices in 2002. Prior to that, he was President, Product Repair Services from 1999 to 2002, Vice President &General Manager, Parts & Carry-In Service from 1998 to 1999 and Vice President & General Manager, Parts from1997 to 1998.

Mr. Kelly joined Sears as Senior Vice President and Chief Information Officer in October 2002. Prior to joiningSears, he was Senior Vice President - Logistics, Information Systems and Technology at Payless Shoesource, Inc.,a footwear retailer, from 1996 to 2001.

Ms. LaPorta joined Sears as Senior Vice President, Strategy in December 2002. Prior to joining Sears, she wasVice President of The Boston Consulting Group, an international strategy and general management consulting firm,from 1986 to 2002.

Mr. Lee joined Sears as Senior Vice President, Human Resources in January 2001. Prior to joining Sears, he wasSenior Vice President, Human Resources of Whirlpool Corporation, a manufacturer of major home appliances,since June 1998. Prior to joining Whirlpool, Mr. Lee served in the same capacity for The St. Paul Companies, aproperty and casualty insurance company.

7

Mr. Liska joined Sears as Executive Vice President and Chief Financial Officer in 2001. He became ExecutiveVice President and President, Credit and Financial Products in October 2002. Prior to joining Sears, Mr. Liskawas Executive Vice President and Chief Financial Officer of The St. Paul Companies since 1997, and Presidentand Chief Executive Officer of Specialty Foods Corporation, a manufacturer of bread and bakery products, from1994 until 1997.

Mr. Richter joined Sears as Vice President and Controller in 2000. He became Senior Vice President, Finance in2001 and held that position until October 2002. Mr. Richter has served as Senior Vice President and ChiefFinancial Officer since October 2002. Prior to joining Sears, Mr. Richter was Senior Vice President and ChiefFinancial Officer of Dade Behring International, a manufacturer of medical testing systems, from 1998 to 2000,and Senior Vice President and Corporate Controller since 1997.

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Item 2. Properties

The Company's principal executive offices are located on a 200-acre site owned by the Company at the Prairie Stoneoffice park, in Hoffman Estates, Illinois. The complex consists of six interconnected office buildings totalingapproximately two million gross square feet of office space.

The following table sets forth information concerning stores operated by the Company's domestic Retail operations.

Full-lineStores Specialty Stores

Lands'End Total

NTB Hardware Dealer Other(a)

Stores at December 28, 2002:Owned 519 89 18 -- 27 -- 653Leased(b) 353 136 231 13 37 15 785Independently owned and operated Stores -- -- -- 754 -- -- 754Total 872(c) 225 249 767 64 15 2,192

Total Stores at Fiscal Year-end:1999 858 310 267 738 40 -- 2,213 Stores opened during fiscal 2000 11 3 10 70 4 -- 98 Stores closed during fiscal 2000 (6) (84) (3) (18) (1) -- (112)2000 863 229 274 790 43 -- 2,199 Stores opened during fiscal 2001 13 1 4 33 14 -- 65 Stores closed during fiscal 2001 (9) (7) (30) (30) (3) -- (79)2001 867 223 248 793 54 -- 2,185 Stores opened during fiscal 2002 15 2 3 13 10 -- 43 Stores acquired through acquisition -- -- -- -- -- 15 15 Stores closed during fiscal 2002 (10) -- (2) (39) -- -- (51)Stores at December 28, 2002 872 225 249 767 64 15 2,192

Gross Retail Area at Fiscal Year-endsquare feet in millions

2002 . . . . . . . . . . . . . . . . . 127.2 2.6 9.3 6.4 4.4 0.1 150.02001 . . . . . . . . . . . . . . . . . 127.3 2.5 9.1 6.6 3.4 -- 148.92000 . . . . . . . . . . . . . . . . . 126.7 2.7 9.3 6.5 2.1 -- 147.3

Retail Net Selling Area at Fiscal Year-endsquare feet in millions

2002 . . . . . . . . . . . . . . . . . 78.8 0.3 6.8 4.1 3.3 0.1 93.42001 . . . . . . . . . . . . . . . . . 79.2 0.3 6.7 4.3 2.4 -- 92.92000 . . . . . . . . . . . . . . . . . 77.7 0.3 7.2 4.3 1.4 -- 90.9

Retail Store Revenues per Net Selling Square Foot (d)

2002 . . . . . . . . . . . . . . . . . $ 3032001 . . . . . . . . . . . . . . . . . $ 3182000 . . . . . . . . . . . . . . . . . $ 332

(a) Consists of small-size appliance and electronic stores, retail outlet stores and The Great Indoors stores. Excludes "Other" facilitiesowned or leased as part of Full-line Store properties.

(b) Many of the leases contain renewal options and contingent rentals (for additional information, see Note 8 of the Notes to ConsolidatedFinancial Statements).

(c)Includes Sears Auto Centers.

(d)Includes net commissions earned from licensed businesses operating within the Retail stores.

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In addition, at December 28, 2002, there were 856 other sales offices and service facilities, most of which areoccupied under short-term leases or are a part of other Sears facilities included in the above table. There were also119 distribution facilities, most of which are leased for terms ranging from one to 10 years.

Credit principally services its accounts at eight regional credit card operations centers ("RCCOCs") in the U.S., oneunit in Puerto Rico, three Credit Processing Centers, at the headquarters of the Bank in Tempe, Arizona and at theCompany's headquarters in Hoffman Estates. The Company owns one of the RCCOCs, one of the Credit ProcessingCenters and leases seven of the RCCOCs and two of the Credit Processing Centers. The Company leases the unit inPuerto Rico.

As of December 28, 2002, Sears Canada operated 123 department stores, 42 furniture and appliance stores, 141 dealerstores, operated under independent local ownership, 15 outlet stores, 52 automotive centers, approximately 2,200catalog pick-up locations and 110 travel offices.

Item 3. Legal Proceedings

Pending against the Company and certain of its officers and directors are a number of lawsuits, described below,that relate to the credit card business and public statements about it. The Company believes that all of these claimslack merit and is defending against them vigorously.

� On October 18, 2002, a lawsuit was filed in the United States District Court for the Northern District ofIllinois against the Company and certain current and former officers alleging that certain publicannouncements by the Company concerning its credit card business violated Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Additional lawsuits of the sametenor followed; with one exception, which is pending in the United States District Court for the NorthernDistrict of California, these cases are pending in the Northern District of Illinois. The plaintiffs purport torepresent classes of shareholders who purchased the Company's common shares between January 17, 2002,and October 17, 2002. The Northern District of Illinois actions are being consolidated into a single classaction.

� On November 15, 2002, two lawsuits were filed in the United States District Court for the Northern District ofIllinois against the Company, certain officers and directors, and alleged fiduciaries of Sears 401(k) SavingsPlan (the "Plan"), seeking damages and equitable relief under the Employee Retirement Income Security Act("ERISA"). The plaintiffs purport to represent participants and beneficiaries of the Plan, and allege breachesof fiduciary duties under ERISA in connection with the Plan's investment in the Company's common sharesand alleged communications made to Plan participants regarding the Company's financial condition. A thirdcomplaint was filed on December 16, 2002, making substantially the same claims. These actions have beenconsolidated into a single class action.

� On October 23, 2002, a purported derivative suit was filed in the Supreme Court of the State of New Yorkagainst the Company (as a nominal defendant) and certain current and former directors seeking damages onbehalf of the Company. The complaint purports to allege a breach of fiduciary duty by the directors withrespect to the Company's management of its credit business. The Company's motion to dismiss is currentlypending. Two similar suits were subsequently filed in the Circuit Court of Cook County, Illinois, and a thirdwas filed in the United States District Court for the Northern District of Illinois. Motions have been or will bemade to dismiss these actions, or, in the alternative, to stay them, pending disposition of the action in NewYork.

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The Company is subject to various other legal and governmental proceedings, many involving litigation incidentalto the businesses. Some matters contain class action allegations, environmental and asbestos exposure allegationsand other consumer-based claims that involve compensatory, punitive or treble damage claims in very largeamounts as well as other types of relief. The consequences of these matters are not presently determinable but, inthe opinion of management of the Company after consulting with legal counsel, and taking into account insuranceand reserves, the ultimate liability is not expected to have a material adverse effect on annual results of operations,financial position, liquidity or capital resources of the Company.

Item 4. Submission of Matters to a Vote of Security Holders

None

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Description of Sears Common Shares

The summary contained herein of certain provisions of the Restated Certificate of Incorporation, as amended (the"Certificate of Incorporation"), of Sears does not purport to be complete and is qualified in its entirety by reference tothe provisions of such Certificate of Incorporation incorporated as Exhibit 3.(i) hereto and incorporated by referenceherein.

The Certificate of Incorporation authorizes the issuance of 1,000,000,000 common shares, par value $0.75 per share,and 50,000,000 preferred shares, par value $1.00 per share. As of the date hereof, there are no preferred sharesoutstanding. Preferred shares may be issued in series with rights and privileges as authorized by the Board ofDirectors.

Subject to the restrictions on dividends mentioned below and the rights of the holders of any preferred shares whichmay hereafter be issued, each holder of common shares is entitled to one vote per share, to vote cumulatively for theelection of directors, to dividends declared by the Board of Directors and, upon liquidation, to share in the assets ofSears pro rata in accordance with his, her or its holdings after payment of all liabilities and obligations. The holders ofcommon shares have no preemption, redemption, subscription or conversion rights.

Sears' Board of Directors is divided into three classes serving staggered three-year terms. Because the Board isclassified, shareholders wishing to exercise cumulative voting rights to assure the election of one or more directorsmust own approximately two to three times as many shares (depending on the number of directors in the class and onthe Board as a whole) as would be required if the Board were not classified. Directors may be removed only for causeupon the affirmative vote of at least 75% of the shares entitled to vote. Such a vote is also required to alter, amend orrepeal, or to adopt any provision inconsistent with, Article 5 of the Certificate of Incorporation concerning directors,or to fix the number of directors by shareholder vote.

There are no restrictions on repurchases or redemption of shares by Sears which do not impair its capital, except thatthe indentures relating to certain of Sears long-term debt and an agreement pursuant to which Sears has provided acredit facility in support of certain tax increment revenue bonds issued by the Village of Hoffman Estates, Illinois, inconnection with the construction of its headquarters facility, provide that Sears will not take certain actions, includingthe declaration of cash dividends and the repurchase of shares, which would cause Unencumbered Assets plus certainCapitalized Rentals to drop below 150% of Liabilities plus such Capitalized Rentals (as such terms are defined in theindentures and the agreement). The amount by which such Unencumbered Assets plus Capitalized Rentals exceeds150% of such Liabilities plus Capitalized Rentals, as computed under certain of the indenture provisions, is set forth inNote 9 of the Notes to Consolidated Financial Statements.

Information regarding the principal market for Sears common shares, the number of shareholders and the prices of,and dividends paid on, Sears common shares is included below and under the heading "Shareholders' Equity -Dividend Payments" contained in Note 9 of the Notes to Consolidated Financial Statements.

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Common Stock Market Information and Dividend Highlights

dollars First Quarter Second Quarter Third Quarter Fourth Quarter Year2002 2001 2002 2001 2002 2001 2002 2001 2002 2001

Stock price rangeHigh 54.29 41.60 59.90 43.02 54.87 47.80 40.69 48.93 59.90 48.93Low 46.55 32.81 47.79 32.62 39.75 29.90 19.71 33.55 19.71 29.90Close 51.27 35.27 54.30 42.31 40.62 34.64 23.15 48.00 23.15 48.00Cash dividends declared 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.92 0.92

Stock price ranges are for the New York Stock Exchange (trading symbol - S), which is the principal market for theCompany's common stock.

In addition to the New York Stock Exchange, the Company's common stock is listed on the following exchanges:Chicago; Pacific, San Francisco; London, England; Amsterdam, the Netherlands; Swiss EBS; and Dusseldorf,Germany.

The number of registered common shareholders at February 28, 2003 was 156,617.

Options to purchase common shares of the Company have been granted to employees and non-employee directorsunder various stock-based compensation plans. The following table summarizes the number of stock optionsissued, the weighted-average exercise price and the number of securities remaining to be issued under alloutstanding equity compensation plans as of December 28, 2002.

Plan Category

Number of securities to beissued upon exercise of

outstanding options, warrantsand rights

Weighted-average exerciseprice of outstanding

options, warrantsand rights

Number of securities remainingavailable for future issuanceunder equity compensation

plans (2)

Equity compensation plansapproved by security holders 21,722,532 $ 40.73 8,125,490

Equity compensation plans notapproved by security holders 5,276,934 (1) $ 38.78 9,723,066

Total 26,999,466 $ 40.35 17,848,556

(1) Sears has a history of promoting employee stock ownership through Company sponsorship of various plans and programs. The sole equity compensation plan not previously submitted to the Company's shareholders for approval is the 2001 Broad Based Stock Option Plan. The Company adopted this plan in 2001 to further enable Sears to align the interests of shareholders with employees by motivating participants to achieve long-range goals while simultaneously providing a program to attract and retain eligible associates. The plan provides for the grant of stock options to eligible associates of Sears with the exception of senior management, which is excluded from participation. Stock options granted under the plan are nonqualified stock options for tax purposes, expire 10 years from the date of grant and may contain conditions requiring participants to satisfy employment, performance or certain other criteria. The exercise price of the options granted is equal to 100% of the fair market value of Sears stock on the date of the grant.

(2) Excludes the securities to be issued upon exercise of outstanding options, warrants and rights.

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Item 6. Selected Financial Data

Five-Year Summary of Consolidated Financial Data

millions, except per common share and shareholders 2002 (1) 2001 2000 1999 1998

OPERATING RESULTSRevenues (2) $ 41,366 $ 40,990 $ 40,848 $ 39,430 $ 39,919Costs and expenses (2) 39,285 39,812 38,661 37,017 38,064Operating income 2,081 1,178 2,187 2,413 1,855Other income, net 372 45 36 6 28Income before income taxes, minority interest, accounting

change and extraordinary item 2,453 1,223 2,223 2,419 1,883Income taxes 858 467 831 904 766Income before accounting change and extraordinary item 1,584 735 1,343 1,453 1,072Cumulative effect of change in accounting principle (208) -- -- -- --Extraordinary item -- -- -- -- (24)Net income $ 1,376 $ 735 $ 1,343 $ 1,453 $ 1,048

FINANCIAL POSITIONCredit card receivables, net (3) $ 30,759 $ 28,155 $ 17,317 $ 18,033 $ 17,972Retained interest in transferred credit card receivables (3) -- -- 3,105 3,211 4,349Merchandise inventories 5,115 4,912 5,618 5,069 4,816Property and equipment, net 6,910 6,824 6,653 6,450 6,380Total assets (3) 50,409 44,317 36,899 36,954 37,675Short-term borrowings (3) 4,525 3,557 4,280 2,989 4,624Long-term debt, including current portion (3) 26,112 22,078 13,580 15,049 15,045Total debt (3) 30,637 25,635 17,860 18,038 19,669Shareholders' equity $ 6,753 $ 6,119 $ 6,769 $ 6,839 $ 6,066

SHAREHOLDERS AND PER SHARE DATAShareholders 157,378 164,354 209,101 220,749 233,494Average common and equivalent shares outstanding 321 329 346 381 392Earnings per common share - diluted Income before accounting change and extraordinary item $ 4.94 $ 2.24 $ 3.88 $ 3.81 $ 2.74 Cumulative effect of change in accounting principle (0.65) -- -- -- -- Extraordinary item -- -- -- -- (0.06) Net income $ 4.29 $ 2.24 $ 3.88 $ 3.81 $ 2.68Cash dividends declared per common share $ 0.92 $ 0.92 $ 0.92 $ 0.92 $ 0.92

Market price - per common share (high-low) 59.90- 19.71

48.93- 29.90

43.50- 25.25

53.19- 26.69

65.00- 39.06

Closing market price at December 31 $ 23.15 $ 47.64 $ 34.75 $ 30.38 $ 42.50

(1) Includes results of operations of Lands' End effective June 17, 2002, the date of acquisition. (See Note 2 of the Notes to Consolidated Financial Statements.)

(2) During 2002, the Company adopted the provisions of Emerging Issues Task Force Issue 01-9, "Accounting for Consideration Given By A Vendor To A Customer", resulting in the restatement of prior year revenues and cost and expenses to conform with current year presentation.

(3) Impacted by a change in securitization accounting in 2001. The Company consolidated its securitization structure and recognized approximately $8.1 billion of debt and credit card receivables and reclassified an additional $3.9 billion to credit card receivables from retained interest in transferred credit card receivables. (See Note 3 of the Notes to Consolidated Financial Statements.)

Certain prior year information has been reclassified to conform with current year presentation.

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Item 7. Management's Discussion and Analysis

Management's Discussion and Analysis is designed to provide the reader of the financial statements with anarrative on the Company's results of operations, financial position and liquidity, risk management activities,significant accounting policies and critical estimates, and the future impact of accounting standards that have beenissued but are not yet effective. Management's Discussion and Analysis is presented in five sections: ConsolidatedOperations, Segment Operations, Outlook, Analysis of Consolidated Financial Condition and Accounting Policies.It is useful to read Management's Discussion and Analysis in conjunction with the Consolidated FinancialStatements and related notes thereto contained elsewhere in this document.

All references to earnings per share relate to diluted earnings per common share.

Acquisition of Lands' End

On June 17, 2002, the Company acquired all outstanding shares of Lands' End, for approximately $1.8 billion. Theresults of Lands' End operations have been reflected in the consolidated financial statements since that date. SeeNote 2 of the Notes to Consolidated Financial Statements for further discussion.

CONSOLIDATED OPERATIONS

Total revenues were $41.4 billion in 2002, compared with $41.0 billion in 2001 and $40.8 billion in 2000.

� Revenues from merchandise sales and services were $35.7 billion in 2002, a decrease of 0.2% from2001, which in turn were 1.4% lower than 2000. Revenues in Full-line Stores were $23.0 billion, adecrease of 5.3% from 2001, which were down 2.9% from 2000. Declines in comparable store sales inboth years were attributable to disruptions caused by the Full-line Store repositioning efforts, a highlycompetitive and promotional retail environment and the effects of a softening economy. Specialty Storesrevenues were $5.1 billion in 2002, an increase of 7.6% from 2001, which were 2.9% higher than 2000. Specialty Stores revenue increases in both years were driven primarily by the expansion of The GreatIndoors, as well as comparable store revenue increases in Dealer Stores. Direct to Customer revenuesincreased to $1.2 billion in 2002, principally due to the addition of Lands' End which was acquired inJune 2002. The revenues of Lands' End from the date of acquisition were approximately $1.0 billion.

� Credit and financial products revenues were $5.7 billion in 2002, an increase of 8.3% from 2001,which in turn were 14.5% higher than 2000. During 2001, the Company adopted Statement of FinancialAccounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assetsand Extinguishments of Liabilities". Prior to April 2001, domestic securitized receivables were recordedas off-balance sheet securitizations under previous accounting rules thereby reducing reported amounts ofrevenues, expenses, assets and liabilities. With the adoption of SFAS No. 140, all receivables are nowreflected on the consolidated balance sheet. Increases in credit revenues in 2002 and 2001 were primarilydue to the consolidation of the domestic securitized receivables in April 2001 and the growth of thedomestic MasterCard product which was launched in June 2000.

Costs and expenses were $39.3 billion in 2002, compared with $39.8 billion in 2001 and $38.7 billion in 2000.

� Cost of sales, buying and occupancy as a percentage of merchandise sales and services was 71.8% in2002, compared to 73.4% in 2001 and 2000. Correspondingly, gross margin rates were 28.2% in 2002and 26.6% in both 2001 and 2000. The improvements in retail gross margin rates have resulted from theexit of certain lower margin and unprofitable merchandise categories, improved inventory managementand vendor sourcing and the inclusion of Lands' End's results in 2002, whose business has a higher grossmargin rate.

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� Selling and administrative expenses as a percentage of total revenues were 22.4% in 2002, compared to21.7% in 2001 and 21.6% in 2000. During 2001, the Company implemented a series of productivityinitiatives resulting in lower corporate and store-level operating costs. The addition of Land's End in2002 as well as investments for expanding The Great Indoors and marketing of the MasterCard product in2002 and 2001 more than offset these reductions.

� The provision for uncollectible accounts ("provision") was $2.3 billion in 2002, compared to $1.9billion in 2001 and $0.9 billion in 2000. The increase in the 2002 provision includes an increase of $300million in the domestic allowance for uncollectible accounts as a result of refining the allowancemethodology to include current accounts and credit card fees. In addition, the Company increased itsallowance for uncollectible accounts to reflect increased delinquencies and bankruptcies resulting fromweakness in the U.S. economy, the seasoning of the domestic MasterCard portfolio and an increase indomestic credit card receivable balances.

Reported amounts were affected by the Company's off-balance sheet accounting treatment for securitizedreceivables prior to April 2001. During 2001, the Company recorded a $522 million provision forpreviously securitized receivables to establish an allowance for uncollectible accounts related to $12billion of securitized receivables reinstated on the Company's balance sheet as a result of the adoption ofSFAS No. 140. From April 2001 forward, the Company's securitization transactions were accounted foras secured borrowings and the Company ceased recording securitization income, which was $40 millionin 2001 and $128 million in 2000.

� Interest expense was $1.1 billion in 2002, compared to $1.4 billion in 2001 and $1.2 billion in 2000.Reported amounts were affected by the Company's off-balance sheet accounting treatment for domesticsecuritized receivables prior to April 2001. Including interest costs on debt related to the off-balancesheet receivables, interest expense would have been $1.1 billion in 2002, $1.5 billion in 2001 and $1.7billion in 2000. The decreases in interest expense were due to the increased use of variable rate financingin a lower interest rate environment, partially offset by additional borrowings to finance the Lands' Endacquisition and higher credit card receivables in 2002.

� Special charges and impairments reflect costs incurred from strategic actions implemented by theCompany to restructure its operations and costs due to asset impairments. Such charges amounted to$111 million in 2002, $542 million in 2001 and $251 million in 2000. The actions taken over the pastthree years are as follows:

� During 2002, Sears Canada converted its seven stores operating under the Eatons banner to SearsCanada stores, resulting in severance, asset impairment and other exit costs amounting to $111million. This restructuring enabled Sears Canada to better leverage its buying and advertisingefforts, and Sears Canada brand equity.

� During 2001, special charges and impairments amounted to $542 million. Such costs consisted of$151 million for the exit of unprofitable and non-strategic Full-line Store business categories(including cosmetics, installed floor coverings and custom window treatments); $123 million forproductivity initiatives designed to reduce operating costs; $205 million for impairment and otherlosses primarily resulting from the insolvency of Homelife (a former operating division of Searswhich was sold in 1998); and $63 million for the cost of a civil legal settlement relating to sellingpractices in 1994 and 1995 of certain automotive batteries manufactured by Exide Technologies.

� During 2000, the Company recorded a special charge of $150 million related to the closing of 87underperforming stores ($136 million recorded in special charges and impairments and $14 millionin cost of sales). The Company also recorded an impairment charge of $115 million to write downthe Sears Termite and Pest Control business to its fair value. This business was sold in 2001.

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Other income was $372 million in 2002, as compared to $45 million in 2001 and $36 million in 2000. Theincrease in 2002 consists primarily of a $336 million pretax gain on the sale of the Company's holdings in AdvanceAuto Parts, Inc.

Income taxes as a percentage of income before taxes, minority interest and cumulative effect of change inaccounting principle were 35.0% in 2002, 38.2% in 2001 and 37.4% in 2000. The lower effective income tax ratein 2002 was attributable to the favorable resolution of a state income tax audit and the benefit of utilizing Canadianoperating loss carryforwards at higher than expected rates. The increase in 2001 from 2000 resulted from arevaluation of Sears Canada's deferred tax asset. The Company expects its effective income tax rate toapproximate 37% in 2003.

During 2002, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets", resulting in a chargeof $208 million (net of income taxes and minority interest), representing the cumulative effect of the change inaccounting for goodwill as of the beginning of 2002. The charge reflects goodwill impairment primarily relatedto National Tire and Battery and Orchard Supply Hardware, offset by the reversal of negative goodwill related toSears Canada's purchase of Eatons.

Net income was $1.4 billion in 2002, $0.7 billion in 2001, and $1.3 billion in 2000. The Company's results ofoperations were affected by certain noncomparable charges and gains during those periods. The Company definesnoncomparable items as transactions that are: related to the implementation of special initiatives of the Company(generally special charges and impairments); unusual or infrequent in nature (e.g., significant one-time transactionsand gains/losses unrelated to core operations); or related to changes in accounting. Management believes thatresults excluding noncomparable items are useful indications of trends in core operations when reviewed in thecontext of reported results. In order to facilitate an understanding of such noncomparable items and their effect onthe results of operations, the following table is provided as a reconciliation of reported earnings to earningsexcluding noncomparable items:

millions, except per share dataPretax Earnings Net Income Earnings per Share

2002 2001 2000 2002 2001 2000 2002 2001 2000

As reported $ 2,453 $ 1,223 $ 2,223 $ 1,376 $ 735 $ 1,343 $ 4.29 $ 2.24 $ 3.88

Special charges and impairments: Sears Canada - Eatons conversion

costs 111 -- -- 40 -- -- 0.13 -- -- Homelife closure -- 185 -- -- 116 -- -- 0.35 -- Productivity initiatives -- 123 -- -- 79 -- -- 0.24 -- Product category exits -- 151 -- -- 97 -- -- 0.30 -- Sears Termite and Pest -- -- 115 -- -- 98 -- -- 0.28 Control impairment Store closings/staff reductions -- -- 150 -- -- 99 -- -- 0.29 Other -- 20 -- -- 13 -- -- 0.04 --

Effect of accounting changes: Effect of change in accounting for

goodwill -- -- -- 208 -- -- 0.65 -- -- Effect of change in estimate for the

allowance for uncollectible accounts 300 -- -- 191 -- -- 0.59 -- -- Provision for previously securitized

receivables -- 522 -- -- 331 -- -- 1.01 -- Securitization income -- (40) (128) -- (26) (82) -- (0.08) (0.24)Unusual/infrequent items: Advance Auto Parts gain (336) -- -- (237) -- -- (0.74) -- -- Exide battery litigation settlement -- 63 -- -- 40 -- -- 0.12 --Excluding noncomparable items $ 2,528 $ 2,247 $ 2,360 $ 1,578 $ 1,385 $ 1,458 $ 4.92 $ 4.22 $ 4.21

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The moderate rate of inflation over the past three years has not had a significant effect on the Company's revenuesand profitability.

SEGMENT OPERATIONS

The Company is organized into four principal business segments - Retail and Related Services, Credit and FinancialProducts, Corporate and Other, and Sears Canada. Following is a discussion of results of operations by businesssegment. The Company reports its business segment results excluding the effects of noncomparable items. Asstated above, the Company believes this presentation facilitates the understanding of the results and trendsaffecting each segment's core operations when reviewed in the context of reported results. This presentation isconsistent with how the Company reports results internally to senior management and the Board of Directors.

Retail and Related Services

Retail and Related Services results, excluding noncomparable items, and key statistics were as follows:

millions, except number of stores and Retail store revenues per net selling square foot

2002 2001 2000

Full-line Stores $ 23,028 $ 24,314 $ 25,043Specialty Stores 5,106 4,747 4,611Direct to Customer 1,175 223 263Product Repair Services 2,150 2,062 2,018 Total Retail and Related Services revenues 31,459 31,346 31,935

Cost of sales, buying and occupancy 22,743 23,081 23,573Selling and administrative 6,816 6,628 6,687Depreciation and amortization 710 704 710Interest 35 32 25 Total costs and expenses 30,304 30,445 30,995Operating income $ 1,155 $ 901 $ 940

Number of Full-line Stores 872 867 863Number of Specialty Stores 1,305 1,318 1,336Lands' End Retail Stores 15 -- --

Total Retail Stores 2,192 2,185 2,199

Retail store revenues per net selling square foot $ 303 $ 318 $ 332

Comparable store sales percentage (decrease) increase (1)

Hardlines -4.1% -1.3% 3.9% Softlines -12.2% -6.8% -1.3% Full-line Stores -6.7% -3.0% 2.1% Specialty Stores 0.9% 2.5% 3.6% Total -5.6% -2.3% 2.3%

(1) For purposes of determining comparable store sales, a store is considered to be comparable at the beginning of the 13th month after the store is opened.

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2002 Compared with 2001

Retail and Related Services is the Company's core business, and generated over $31 billion in annual revenue in2002. In order to enhance the customer experience and improve operating performance, the Company undertook arepositioning of Full-line Stores in 2002 to improve merchandise presentation and provide easier, more convenientshopping. The repositioning led to a disruptive sales environment, contributing to comparable store sales declines.However, significant progress was made towards the repositioning plan, resulting in an increase in the overallprofitability of the segment.

To enhance the customer's in-store experience, the Company installed centralized checkouts, simplified storesignage, provided shopping carts and standardized fixturing and store layouts. To improve merchandise offerings,the Company reduced the number of brands and labels it carries as a result of regularly reviewing every brand todetermine customer relevancy and profitability. In addition, the Company is focusing on classically-styled apparelso as to clarify the merchandise offerings to its customers. The Covington brand was rolled out in 2002 and isexpected to be a $500 million brand by year-end 2003. The Company exited unprofitable businesses, includingcosmetics, installed carpet and custom window treatments. The acquisition of Lands' End in June 2002 adds anationally recognized apparel brand that fits well with the Company's Hardlines customers, creates differentiation,and improves the quality of the Softlines offerings. Lands' End merchandise was introduced in 183 stores in 2002,and a full rollout to all Full-line Stores is expected by the fall of 2003.

Retail and Related Services revenues increased 0.4% in 2002, primarily due to the acquisition of Lands' End andthe opening of seven new The Great Indoors stores, offset by a decline of 5.6% in comparable store sales. Full-lineStores revenues decreased 5.3%, and comparable store sales declined 6.7% as a result of store-level disruptionscaused by the repositioning effort, a highly competitive and promotional retail environment and a weak U.S.economy. In Hardlines, comparable store sales declined 4.1%, as sales of home appliances, electronics and otherbig-ticket items slowed in the second half of 2002. Hardline sales were also negatively impacted by the exit ofcertain lines including bicycles and the editing of product offerings, such as home computers. In Softlines,comparable store sales declined 12.2%. As discussed above, the Company exited a number of Softline businessesand reduced the number of brands it carries which negatively impacted 2002 revenues. The Company expectsimproving comparable store revenue trends in its Full-line Stores, primarily in the second half of 2003, due to theexpected positive impacts of its initiatives to improve merchandise offerings and enhance the customer shoppingexperience.

Specialty Stores revenues increased 7.6% in 2002 due to the addition of seven The Great Indoors stores and acomparable store sales increase of 0.9%. Comparable store sales increases of 4.2% in Dealer Stores were partiallyoffset by comparable store sales declines of 4.1% in NTB and 0.3% in Hardware stores. As stated above, theCompany opened seven The Great Indoors stores in 2002, bringing the total to 20 stores. To date, the results ofThe Great Indoors stores have not met the expectations of management. As a result, the Company has slowed thepace of The Great Indoors store openings and initiated actions to improve the profitability and productivity of theformat. The Company expects to open one The Great Indoors store in 2003.

Direct to Customer revenues increased over the prior year primarily due to the acquisition of Lands' End, whichcontributed approximately $1.0 billion in revenues in 2002. Product Repair Services revenues increased to $2.2billion in 2002 due to increased product repair revenues resulting from a vendor product recall and a recentagreement to provide repair services for an appliance manufacturer.

Retail and Related Services gross margin as a percentage of Retail and Related Services revenues improved 130basis points in 2002. The improvement occurred as a result of the exit of unprofitable merchandise categories inFull-line Stores, improved inventory management and strategic sourcing initiatives across all formats and theinclusion of Lands' End, which has a higher margin rate.

19

Retail and Related Services selling and administrative expense as a percentage of Retail and Related Servicesrevenues increased 60 basis points in 2002 from 2001. While the Company continued to recognize expensesavings from its productivity initiatives in 2002, selling and administrative expense leverage was unfavorablyaffected by decreases in Full-line Store revenues, the rollout of the additional The Great Indoors stores and theinclusion of Lands' End, which has a higher expense rate.

Retail and Related Services operating income was $1,155 million in 2002, $254 million higher than 2001, due tothe benefits of the Full-line Store repositioning, strategic sourcing initiatives, margin rate improvements and theinclusion of Lands' End.


In 2001, the Company began reviewing product offerings in an effort to remove unprofitable merchandise offeringsas well as eliminate merchandise lines that were not relevant to our customers. Throughout the year, merchandiseofferings were edited substantially, particularly in the home office category, while some businesses were exited,such as cosmetics and bicycles. As a result, total Retail and Related Services revenues decreased 1.8% to $31.3billion, and comparable store sales decreased by 2.3%.

Full-line Stores revenues decreased 2.9% to $24.3 billion in 2001, as comparable store sales decreased 3.0%, andfour net new stores were added. In Hardlines, increases in home appliances revenue were primarily due toincreased sales of the Company's newly launched energy efficient laundry products and food storage products. Home office revenue declines can be attributed to declines in computer and computer accessories sales, as theseproduct offerings were significantly edited during 2001 in an effort to improve gross margin. Merchandise editswere also made within the home fitness category, in which bicycle product offerings were removed and game roomand other fitness product categories were expanded. In Softlines, mattress product offerings were successfullyreintroduced in the Full-line Stores in the second quarter of 2001 which positively impacted sales. The Company'sexit of the skin care and color cosmetics business contributed to revenue declines in Softlines. Specialty Storerevenues increased 2.9% to $4.7 billion in 2001 from 2000. The increase reflects the addition of nine The GreatIndoors stores and overall comparable store sales growth of 2.5%, which was led by increases in Dealer stores.

Direct to Customer revenues decreased from the prior year primarily due to revenue declines in Customer Directand Clubs and Services due to the elimination of under-performing product offerings. Product Repair Servicesrevenues increased primarily due to improvements in product repair as well as the heating and cooling business.

Retail and Related Services gross margin as a percentage of Retail and Related Services revenues improved 20basis points in 2001 compared with 2000. The year ended December 29, 2001 included a LIFO charge of $25million whereas 2000 included a LIFO credit of $29 million. Excluding the LIFO adjustments, the gross marginrate improved 40 basis points, primarily reflecting margin improvement within virtually all retail businesses exceptFull-line Stores. The decline in Full-line Stores was primarily due to increased markdown activity in 2001,partially offset by benefits achieved through strategic sourcing initiatives.

Retail and Related Services selling and administrative expense as a percentage of Retail and Related Servicesrevenues increased 20 basis points in 2001 from 2000. While the Company began to recognize expense savingsfrom its productivity initiatives in the second half of 2001, selling and administrative expense leverage wasunfavorably affected by the decrease in sales throughout 2001.

Retail and Related Services operating income was $901 million in 2001, $39 million lower than 2000, as lowerrevenues and unfavorable expense leverage were partially offset by higher gross margin rates.

20

Credit and Financial Products

Credit and Financial Products results, excluding noncomparable items, were as follows:

millions 2002 2001 2000

Credit and Financial Products revenues $ 5,392 $ 5,216 $ 5,247

Selling and administrative 955 833 810Provision for uncollectible accounts 1,903 1,441 1,358Depreciation and amortization 18 18 16Interest 1,014 1,395 1,550 Total costs and expenses 3,890 3,687 3,734

Operating income $ 1,502 $ 1,529 $ 1,513

A summary of Credit information is as follows:2002 2001 2000

Credit share (1) 44.0% 47.0% 47.4%Average account balance as of year-end (dollars): Sears Card $ 1,196 $ 1,142 $ 1,136 MasterCard $ 1,562 $ 1,112 $ 805 Total portfolio $ 1,321 $ 1,136 $ 1,113

Portfolio yield: Sears Card 19.48% 19.56% 19.88% MasterCard 15.53% 15.16% 9.59% Total portfolio 18.29% 19.14% 19.68%

(1) Credit share is the percentage of retail sales, excluding Direct to Customer, Orchard Supply Hardware and National Tire and Battery, paid for with a Sears credit product (Sears Card or MasterCard).

millions % of % of % of2002 Total 2001 Total 2000 Total

Average managed credit card receivables: Sears Card $ 19,836 69.9% $ 23,819 90.5% $ 25,336 98.1% MasterCard 8,536 30.1% 2,499 9.5% 494 1.9% Total $ 28,372 100.0% $ 26,318 100.0% $ 25,830 100.0%

Ending managed credit card receivables: Sears Card $ 18,391 59.8% $ 22,321 80.9% $ 25,648 95.0% MasterCard 12,375 40.2% 5,278 19.1% 1,353 5.0% Total $ 30,766 100.0% $ 27,599 100.0% $ 27,001 100.0%

Portfolio Initiatives

During fiscal 2000, the Company embarked on a strategy to grow the credit business and reverse the decliningmarket share held by the Sears Card portfolio. Sears Card usage had been declining in recent years, as aggressiveexpansion by bank card competitors had reduced the relevance of the Sears Card product to a segment of theCompany's customers. During 2000, the Company introduced a co-branded bank card product, the MasterCard, asa means to offer a more relevant product to a subset of Sears customers, to win a greater share of customers' creditspend and to create long-term, higher-spend customer relationships. In 2000, the Company substitutedapproximately seven million Sears Card accounts with MasterCard accounts. These accounts were generally theCompany's highest credit quality customers who were generally not incurring finance charges, either because

21

cardholders were not using their cards, or were using the cards only for convenience, generally making fullpayments within the traditional grace period. An additional 18 million Sears Card accounts, including someaccounts that carried light revolving balances, were substituted with MasterCard in 2001 and 2002, bringing thetotal number of substituted accounts to approximately 25 million at year-end 2002, comprising approximately 85%of the MasterCard balances.

During 2001 and 2002, the Company also marketed the MasterCard product to non-current Sears customersthrough other channels, including direct mail offerings, in-store promotions and by phone and the internet. TheCompany issued approximately two million cards through such channels. These accounts represent approximately15% of the MasterCard balance as of December 28, 2002.

The MasterCard initiative has been successful in providing a product more geared to Sears highest qualitycustomers and has been successful in building balances in the portfolio. Average managed credit card receivableshave increased from $25.8 billion at the end of 2000 to $28.4 billion at the end of 2002. Even though theMasterCard portfolio consists primarily of pre-existing Sears Card customers, the substitutions stimulated new anddifferent activity that causes the MasterCard portfolio to behave differently from the Sears Card portfolio. Theseanticipated behavioral changes cause the MasterCard portfolio to perform like a young portfolio, even though theCompany has long-term relationships with many of the accountholders.

The source of credit card receivable balances is different between the two portfolios. Credit card receivables in theSears Card portfolio are primarily generated by customers purchasing goods and services from the Company'sretail operations, whereas credit card receivables in the MasterCard portfolio can be generated from customers'internal and external purchases, balance transfers from another credit card, convenience checks or cash advances.


In 2002, Credit and Financial Products revenues increased 3.4% to $5.4 billion compared to the prior year. Theincrease in revenues was primarily due to a 7.8% increase in average balances, partially offset by an 85 basis pointdecline in portfolio yield. The decline in portfolio yield is primarily the result of the shift of the portfoliocomposition from an average of 9.5% MasterCard accounts in 2001 to 30.1% in 2002. The MasterCard productgenerally carries a risk-based variable finance charge rate that is typically lower than the finance charge rate on theSears Card (see further discussion under "Account Management Programs"). In addition, MasterCardaccountholders typically repay their accounts more quickly, which reduces the yield generated on the portfolio. The increase in average per card balances was primarily attributable to the growth of the MasterCard portfolio,which carries a higher average credit line and outstanding balances, and has greater utility due to its globalacceptance and cash access features.

In mid-2002, the Company changed the terms of substantially all the Sears Cards to move from a fixed rate financecharge to a variable rate finance charge. The variable rate finance charge is based on the prime rate plus a fixedspread. At the time of the change, the initial variable rate was designed to provide finance charge ratesapproximately equal to the fixed finance charge rates in place at that time. MasterCard finance charge rates arealso primarily variable, based on the prime rate plus a fixed spread. Finance charge rate changes are effective themonth following the month a change in the prime rate occurs. During November 2002, the prime rate declinedfrom 4.75% to 4.25%. Therefore, the finance charge rate applicable for billing cycles beginning in December 2002was 4.25%. The Company expects changes in yield to be largely offset by changes in interest expense, as fundingis primarily through variable rate debt.

Interest expense decreased by $381 million in 2002 compared to the prior year. The decrease was attributable tothe Company's use of variable rate funding in a lower interest rate environment, partially offset by higher fundinglevels to support receivables growth as well as a widening of Company credit spreads over applicable referencerates. As of December 28, 2002 and December 29, 2001, approximately 83% and 85%, respectively, of theCompany's funding portfolio was variable rate debt. The Company allocates domestic debt and interest expense to

22

its Credit and Financial Products segment, assuming that the segment would be capitalized at a 9 to 1 debt to equityratio.

Credit and Financial Products selling and administrative expense increased 14.6% in 2002 from 2001 levels. Theincrease was primarily due to increases in costs associated with the continued roll-out of the MasterCard product,marketing, payroll and benefits expense and consumer fraud costs. These increases were partially offset byincreased reimbursement from Retail and Related Services for zero-percent financing.

The provision increased by $462 million in 2002 compared to 2001. The Company increased its allowance foruncollectible accounts to reflect increased delinquencies and higher expected charge-offs resulting from a difficulteconomy, the seasoning of the MasterCard portfolio and an increase in the domestic credit card receivablebalances. See "Discussion of Portfolio Quality" below.

Credit and Financial Products operating income decreased by $27 million in 2002 over 2001, primarily due toincreases in the provision and selling and administrative costs, partially offset by lower funding costs and increasedrevenues.


In 2001, Credit and Financial Products revenues decreased 0.6% to $5.2 billion compared to the prior year. Thedecrease in revenues was primarily due to a 54 basis point decrease in portfolio yield, partially offset by anincrease in average per card balances.

Interest expense decreased by $155 million in 2001 compared to the prior year. The decrease primarily reflects theCompany's increased use of variable rate financing in a declining interest rate environment. At year-end 2001 and2000, 85% and 33%, respectively, of the Company's funding portfolio was variable rate. The shift to more variablerate funding was in response to the growth of variable rate receivables within the credit card portfolio (primarilythe MasterCard product) and the Company's intention to convert the Sears Card finance charges from fixed rate tovariable rate in 2002.

Credit and Financial Products selling and administrative expense increased 2.8% in 2001 from 2000 levels. Theincrease was primarily due to an increase in consumer fraud costs, payroll and benefits, customer notificationexpenses and costs associated with the continued roll-out of the MasterCard product. These increases werepartially offset by decreases in outsourcing expenses as well as increased reimbursement from Retail and RelatedServices for zero-percent financing.

The provision increased by $83 million in 2001 compared to 2000. The provision increase primarily reflects anincrease in receivable balances in 2001 due to the growth of the MasterCard. See "Discussion of PortfolioQuality" below.

Credit and Financial Products operating income increased by $16 million in 2001 over 2000, primarily reflectinglower funding costs partially offset by decreased revenues, increased selling and administrative costs and theincreased provision.

Discussion of Portfolio Quality

The quality of the Company's credit card portfolio at any time reflects, among other factors, the credit worthinessof the individual accountholders, the general economic conditions, the success of the Company's accountmanagement and collection activities and the life cycle stage of the portfolio. The Company's financial results aresensitive to changes in delinquencies and net charge-offs of the Company's credit card receivable portfolio. Duringperiods of economic weakness, delinquencies and net charge-offs are more likely to increase.

23

The substitution program discussed under "Portfolio Initiatives" above has positively impacted the overall qualityof the credit portfolio, as the substitution program has targeted the Company's highest credit quality accounts. Portfolio growth during this period is primarily attributable to substitution programs. The average account balancefor the MasterCard product has increased considerably during the period, from $805 in 2000 to $1,562 in 2002. Such balance growth is due to the expanded utility of the product, as customers can use the MasterCard at othermerchants, and is a result of its balance transfer and cash access features. While the expanded utility and higherbalances have generated additional revenues, the Company has experienced an increase in charge-off rates withincreased bankruptcies contributing to charge-offs. The increase in charge-offs is primarily related to thecontinuing soft economic environment that prevailed during 2002 and the seasoning of the MasterCard portfolio. In addition, as discussed above under "Portfolio Initiatives", the MasterCard substitutions stimulated differenttypes of balance growth than have historically existed in the portfolio. Portions of that balance growth, particularlyon accounts that utilized the cash access features of the MasterCard, have a higher charge-off rate than historicalportfolio levels.

The Company has taken actions to mitigate the deteriorating delinquency and charge-off results, including raisingthe risk criteria required for application approval, reducing marketing efforts in channels outside of the Sears storesand decreasing initial credit lines. The Company has also made major investments in collection technology andtraining, improving both the productivity and effectiveness of the collection process. In addition, during 2002 andearly 2003, the Company adjusted the risk criteria across a number of activities including balance transfer andconvenience check strategies and MasterCard substitution thresholds. The Company has also revoked lines ofcredit and accelerated credit line decreases on certain delinquent and/or inactive accounts.

As of year-end 2002, 2001 and 2000, MasterCard accounts represented approximately 40%, 19% and 5%,respectively, of total ending managed credit card receivables. The Company expects that such percentages willgrow slightly in 2003, as continued growth in MasterCard credit card receivables will offset expected declines inSears Card receivables. The age of the MasterCard portfolio is an important factor related to the delinquency andloss levels because delinquencies and charge-offs typically increase as young portfolios mature (referred to as"seasoning"). Consequently, as the MasterCard portfolio matures, the delinquency and charge-off rates areexpected to increase in 2003. The Company expects the total portfolio net charge-offs to average 6.5% - 7.0% in2003.

Delinquencies

The entire balance of an account, including any balances related to zero-percent sales in that account (seediscussion under "Account Management Programs"), is considered delinquent if the minimum payment is notreceived by the payment due date. The aging methodology is based on the number of completed billing cyclesduring which a customer has failed to make a required payment. Delinquencies not only have the potential toreduce earnings by increasing the allowance for uncollectible accounts and related provision expense, but they alsoresult in additional operating costs dedicated to resolving the delinquencies. As further discussed in "AccountManagement Programs", the Company contractually charges off accounts at 240 days, whereas most bank cardissuers charge off at 180 days. As a result, the Company's delinquency rates are not directly comparable toparticipants in the bank card industry.

24

The Company has traditionally reported 60-plus day delinquencies. As such, the following chart summarizes the60-plus day delinquencies for the past two years.

During 2002, 60-plus day delinquency rates for the portfolio increased by 11 basis points as compared to 2001.Because the MasterCard portfolio has a lower delinquency rate than the Sears Card portfolio, the growth in theMasterCard portfolio coupled with the decline in the Sears Card portfolio resulted in only an 11 basis pointincrease in the total portfolio delinquency rate as compared to 2001 despite the fact that the delinquency rates forboth the Sears Card and MasterCard portfolios experienced larger increases. The 60-plus day delinquency rate forthe Sears Card portfolio increased to 10.34% at December 28, 2002, compared to 8.91% at December 29, 2001and 7.94% at December 30, 2000. The 60-plus day delinquency rate for the MasterCard portfolio increased to3.76% at December 28, 2002, compared to 1.97% at December 29, 2001 and 0.38% at December 30, 2000. TheSears Card delinquency rate increase reflects the migration of higher credit quality customers to MasterCard andthe effects of the soft economic environment. The increase in the MasterCard portfolio delinquency rate reflectsthe seasoning of the portfolio as well as the soft economic environment.

Charge-offs

Net charge-offs consist of the principal amount of losses (excluding accrued finance charges and credit card fees)less current period recoveries. The Company charges off credit card receivable balances automatically when acustomer's number of missed monthly payments outstanding reaches eight. Accounts may be charged off sooner inthe event of customer bankruptcy. The Company has a re-aging policy to cure delinquent accounts when thecustomer has demonstrated a pattern of meeting payment requirements by making two consecutive monthlypayments. Accounts cannot be re-aged more than once in a twelve-month period. The amount of balances re-ageddecreased in 2002 to 2.0% of ending portfolio balances as compared to 2.4% in 2001 and 2.5% in 2000.

60-Plus Day Delinquency Rates

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

7.86%

1.15%

7.50%

7.86%

1.20%

7.26%

8.13%

1.93%

7.41%

8.91%

1.97%

7.58%

8.77%

2.55%

7.31%

8.75%

2.57%

6.87%

9.74%

2.99%

7.24%

10.34%

3.76%

7.69%

Sears Card

MasterCard

Total

2001 2002

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Gross charge-offs reflect the uncollectible principal of a customer account. Uncollectible finance charges and feesare recorded as a reduction of revenue. Recoveries reflect the amounts collected on previously charged off creditcard receivable accounts. The Company's charge-off activity for the managed portfolio is summarized below:

millions 2002 2001 2000

Gross charge-offs Sears Card $ 1,648 $ 1,786 $ 1,800 MasterCard 301 42 1 Total 1,949 1,828 1,801Recoveries Sears Card (400) (427) (478) MasterCard (11) (1) -- Total (411) (428) (478)Net charge-offs Sears Card 1,248 1,359 1,322 MasterCard 290 41 1

Total $ 1,538 $ 1,400 $ 1,323

Bankruptcy filings $ 900 $ 805 $ 698

Net charge-offs as a % of average receivables: Sears Card 6.29% 5.71% 5.22% MasterCard 3.40% 1.64% 0.20% Total 5.42% 5.32% 5.12%

Net charge-offs as a percent of average balances increased to 5.42% in 2002, up 10 basis points and 30 basis pointsfrom 2001 and 2000, respectively. The MasterCard net charge-off rate increase reflects the seasoning of theportfolio and increased charge-offs related to balance transfers, cash advances and higher average credit lines onthe MasterCard accounts. The Sears Card increase reflects the migration of higher quality accounts from SearsCard to MasterCard. The charge-off rate for both portfolios was also affected by the economic environment asboth contractual and bankruptcy charge-offs increased. On a unit basis, bankruptcy filings were up 3.6% for theyear, which compares favorably with an industry rate of 5.9%. Bankruptcy filings dollars increased $95 million in2002 over prior year levels primarily due to the MasterCard portfolio. Because the MasterCard accounts have ahigher average balance, the dollar value of the bankruptcy filings has increased, and is expected to increase againin 2003, as the MasterCard portfolio matures. As was the case with delinquencies, the total net charge-off ratebenefited from the change in mix of the portfolio due to the fact that MasterCard, which currently has a lower netcharge-off rate than the Sears Card, has become an increased percentage of the total portfolio and has not yetreached a seasoned charge-off rate. The net charge-off rate experienced over the past two years is summarizedbelow:

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Net Charge-Off %

0.00%

2.00%

4.00%

6.00%

8.00%

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year

5.29%

0.80%

5.07%

5.78%

0.90%

5.42%

6.03%

2.02%

5.62%

5.78%

2.09%

5.23%

6.16%

2.65%

5.43%

6.20%

2.99%

5.32%

6.52%

3.62%

5.55%

6.37%

3.84%

5.40%

Sears Card

MasterCard

Total

2001 2002

5.71%

1.64%

5.32%

6.29%

3.40%

5.42%

Provision and Allowance for Uncollectible Accounts

The Company maintains an allowance for uncollectible accounts at an amount estimated to be adequate to absorbprobable losses, net of recoveries, inherent in the existing portfolio. The Company provides for the estimatedbalance of uncollectible finance charges and credit card fees in its allowance for uncollectible accounts. Theamount of the allowance necessary is determined primarily based on a migration analysis of current and past dueaccounts and the current and projected level of bankruptcies. In evaluating the adequacy of the allowance,management also considers recent trends in delinquencies, recoveries, bankruptcies and charge-offs as well aseconomic conditions and other portfolio data. Management believes that the allowance for uncollectible accountsis adequate to cover anticipated losses in the reported credit card receivable portfolio under current conditions. The following table summarizes the activity in the domestic allowance for uncollectible accounts for the periodsindicated:

millions 2002 2001 2000

Balance, beginning of year $ 1,115 $ 649 $ 725

Provision excluding noncomparable items 1,903 1,441 1,358Noncomparable items: Change in estimate 300 -- ` -- Securitization adjustment -- (153) (522) Provision for previously securitized receivables -- 522 --Domestic provision including noncomparable items 2,203 1,810 836

Net charge-offs (1) (1,538) (1,247) (801)Transfer to Securitization Master Trust -- (83) (111)Reduction for accounts sold (2) -- (14) --Allowance for uncollectible accounts $ 1,780 $ 1,115 $ 649

Allowance as percent of ending owned balances 5.79% 4.04% 4.03%

(1)

(2) Excludes securitization adjustments of $153 million and $522 million in 2001 and 2000, respectively. In the fourth quarter of 2001, the Company sold receivables related to its Home Improvement Services businesses.

In 2002, the Company increased its allowance for uncollectible accounts as a percentage of credit card receivables

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to 5.79% from 4.04% in 2001 and 4.03% in 2000. In the second quarter of 2002, the Company refined itsmethodology for determining the uncollectible portion of current accounts and credit card fee balances, resulting inan increase to the allowance for uncollectible accounts in the amount of $300 million. In accordance withAccounting Principles Board Opinion No. 20, "Accounting Changes", the effect of this change in accounting wasrecorded as a change in accounting estimate. In addition, the Company increased its domestic allowance foruncollectible accounts by $365 million in 2002 to reflect increased delinquencies and bankruptcies resulting from asoft economy, the seasoning of the MasterCard portfolio and an increase in receivable balances.

Account Management Programs

The Company has historically utilized certain account management programs designed to support retail promotionsand maximize collections. Such programs, some of which are not typical among bank card issuers, include the useof (a) no minimum payment/zero-percent financing for up to 12 months for the Company's retail customers, (b)percentage off promotions, (c) a 240-day contractual delinquency period, (d) a renewal or workout program for latestage delinquencies, (e) a re-aging policy and (f) an annual percentage rate ("APR") structure. The following is adescription of these programs:

a. No minimum payment/zero-percent financing - The Company utilizes "zero-percent" credit promotions aspart of its retail promotional strategy. Under the terms of the zero-percent credit promotions, qualifyingpurchases from the Retail and Related Services segment financed by the Company's credit products do notaccrue interest for a period ranging from three to twelve months. As the purpose of these promotions is tobenefit retail sales, the Retail and Related Services segment reimburses the Credit and Financial Productssegment for carrying such zero-percent balances at a 10% annualized rate, recorded as operating expensein Retail and Related Services with an offsetting benefit to Credit and Financial Products operatingexpense. Receivable balances attributable to such programs approximate 6.6%, 6.7% and 7.5% of totalmanaged domestic credit card receivables at year-end 2002, 2001 and 2000, respectively. Accountholderswho use such programs are generally higher credit quality customers. The no minimum payment terms onpromotional items require timely payments on all non-promotional credit purchases; otherwise the entireaccount balance becomes delinquent and subject to standard finance charges.

b. Percentage off promotions - The Company utilizes "credit sales" as part of its retail promotional strategy. During these promotional events, customers who make purchases from the Retail and Related Servicessegment that are paid for with a Sears credit product receive a discount on their purchases (e.g., 10% offall purchases on a Sears Card). As the primary purpose of these promotions is to drive retail sales, theRetail and Related Services segment absorbs the costs of these promotions.

c. 240-day contractual delinquency period - The Company charges off credit card receivable balancesautomatically when a customer's number of missed monthly payments outstanding reaches eight. Accounts are charged off sooner in the event of customer bankruptcy. For regulated bank card issuers,accounts are charged off after 180 days of contractual delinquency (i.e., after a contractually due paymentis not paid within 180 days). The Company's extended delinquency period is designed to deliveradditional economic returns to shareholders while at the same time working with accountholders toresolve the delinquency and maintain a retail relationship. The Company has consistently applied thepractice for several years and the 180-239 day delinquencies are included in determining the allowancefor uncollectible accounts.

d. Renewal or workout programs - For accounts more than 150 days past due, the Company provides a term-out or renewal program to qualified accountholders. These programs provide for a fixed amortizationschedule over a 50 or 52-month term, with credit lines reduced to zero and not re-extended at time of pay-off. As with the renewal program, the Company will provide a fixed amortization schedule for consumersinvolved in a qualified, non-profit, debt counseling program. Under this approved debt counselingprogram, credit lines are reduced to zero and not re-extended at the time of pay-off. Accounts in a

28

workout program are considered current upon receipt of the first agreed upon payment and remain currentas long as they abide by the terms of the program. Workout programs are offered by other retail and bankcard issuers and are considered by accountholders to be preferable to a reported charge-off. Credit cardreceivable balances under such programs were approximately 3.8%, 4.0% and 3.8% of total domesticcredit card balances at year-end 2002, 2001 and 2000, respectively, with the majority involved in aqualified, non-profit, debt counseling program. As the workout programs are considered in determiningthe allowance for uncollectible accounts, reported results reflect the costs of expected losses inherent insuch programs.

e. Re-aging policy - The Company has a re-aging policy to cure delinquent accounts when the customer hasdemonstrated a pattern of meeting payment requirements by making two consecutive monthly payments. Accounts cannot be re-aged more than once in a twelve-month period. The amount of balances re-ageddecreased in 2002 to approximately 2.0% of ending portfolio balances as compared to 2.4% in 2001 and2.5% in 2000.

f. APR structure - Almost all of the Sears Card portfolio APR is variable priced at prime rate + 17.15%. This translates into an APR of 21.4% based on a prime rate of 4.25%. Sears Card accounts that are morethan two cycles past due move into performance pricing in which the APR is adjusted to prime rate +20.15% (APR of 24.4% based on a prime rate of 4.25%). The MasterCard portfolio has APR price pointsranging from 11.24% (prime rate + 6.99%) to 21.9% (fixed). As discussed earlier, the majority of thecredit card receivable portfolio is variable priced and is adjusted as the prime rate changes. Accounts arepriced using risk and activation models with lower risk accounts generally receiving the lower rates. TheCompany has been acquiring MasterCard accounts nationally through in-store channels since March 2002.Rates on MasterCard accounts acquired in-store range from 13.9% to 21.9% fixed. As with the SearsCard portfolio, accounts that are more than two cycles past due move into performance pricing. Performance pricing ranges from 23.5% to 24.0%. All accounts in performance pricing will return totheir original APR if six consecutive monthly payments are made.

Corporate and Other

Corporate and Other segment results were as follows:

millions 2002 2001 2000

Home Improvement Services revenues $ 326 $ 378 $ 353

Cost of sales, buying and occupancy 121 159 144Selling and administrative 442 473 407Depreciation and amortization 55 58 53 Total costs and expenses 618 690 604

Operating loss $ (292) $ (312) $ (251)

Revenues from the home improvement services businesses included in the Corporate and Other segment decreasedby 13.8% to $326 million in 2002 primarily due to the disposition of Sears Termite and Pest Control, Inc. onOctober 1, 2001. Segment operating loss improved by $20 million, reflecting the benefits of productivityinitiatives.

Revenues from the home improvement services businesses included in the Corporate and Other segment increasedby 7.1% in 2001 to $378 million primarily due to strong performance by the siding and windows business.Segment operating loss was $61 million higher due to increased home office expenses. The increase primarilyreflected consulting expenses related to the development of the Company's strategic initiatives.

On October 1, 2001, the Company completed the sale of certain assets of its wholly-owned subsidiary, Sears

29

Termite and Pest Control, Inc., to the ServiceMaster Company. Under the terms of the transaction, the Companywill provide certain transition services and may share in the cost of remediating termite damage claims in excess ofdefined amounts, if any, for a limited period of time. This transaction did not materially affect results of operationsor the consolidated financial position of the Company.

Sears Canada

Sears Canada results were as follows:

millions, except revenues per net selling square foot 2002 2001 2000

Merchandise sales and services $ 3,913 $ 4,031 $ 3,989Credit revenues 276 294 293 Total revenues 4,189 4,325 4,282

Cost of sales, buying and occupancy 2,782 2,994 2,901Selling and administrative 1,036 997 1,038Provision for uncollectible accounts 58 56 48Depreciation and amortization 92 83 60Interest 94 111 113

Total costs and expenses 4,062 4,241 4,160

Operating income $ 127 $ 84 $ 122

Revenues per net selling square foot $ 180 $ 190 $ 193

Comparable store sales percentage (decrease) increase -4.3% -0.4% 5.0%


Similar to the domestic segments, Sears Canada focused on improving its business model in 2002 in order toincrease profitability in the current challenging environment. During 2002, the Company completed its conversionof the remaining Eatons stores to Sears Canada Stores.

Total Sears Canada revenues were $4.2 billion in 2002, a 3.1% decrease compared to 2001. Sears Canada's totalmerchandise sales decreased by 2.9% while same store sales decreased by 4.3%. The decline in revenue reflectsreduced promotional activity as well as disruption caused by store renovations. Sales in most merchandisecategories declined from the previous year, with the decline in electronics being most significant. Sales in majorappliances, however, were positive compared to 2001 due to the growth brought about by strong housing starts.

Credit revenues were down 6.1% compared to the prior year primarily due to customers carrying lower chargeaccount receivable balances. Within Sears Canada credit operations, the net charge-off rate increased to 4.5% in2002 from 4.1% in 2001. Canada experienced similar economic conditions as the U.S. and as a result, charge-offsincreased.

Sears Canada gross margin rate as a percentage of merchandise sales and services revenues improved by 320 basispoints in 2002 reflecting improved inventory levels, leading to lower liquidation losses and a reduction in the levelof unprofitable promotional activity.

Sears Canada selling and administrative expense as a percentage of total revenues increased 160 basis points in2002, despite operating expense reductions in several areas such as payroll and benefits. The increase resultedfrom higher performance based incentive expense as a result of its improved profitability.

Sears Canada depreciation and amortization increased by $9 million or 10.8% due to the absence of theamortization of negative goodwill, which was written off upon adoption of SFAS No. 142. Interest expense

30

declined $17 million or 15.3% compared to the prior year due to lower funding needs.

Sears Canada operating income improved by $43 million, or 51.2%, primarily due to improved margin rates.


The Canadian economy exhibited recessionary characteristics in 2001, resulting in a very soft and challengingretail environment. In response to the adverse market conditions, Sears Canada focused on enhancing productivityby reducing inventory, operating expenses and capital expenditures throughout 2001.

Total Sears Canada revenues were $4.3 billion in 2001, a 1.0% increase over 2000. Sears Canada's totalmerchandise sales increased by 1.1% while same store sales decreased by 0.4%. Full-line and Specialty formatsposted sales gains, partially offset by a decline in Catalog sales. Sears Canada's store revenue per selling squarefoot declined in 2001, reflecting disappointing sales results at the Eatons stores.

Credit revenues were flat compared to the prior year. Within Sears Canada credit operations, the net charge-offrate increased to 4.1% in 2001 from 4.0% in 2000 and as a result the provision for uncollectible accounts increasedby $8 million.

Sears Canada gross margin rate as a percentage of merchandise sales and services revenues declined by 160 basispoints in 2001 reflecting increased markdown activity as well as higher buying and occupancy expenses associatedwith the Eatons stores.

Sears Canada selling and administrative expense as a percentage of total revenues improved 110 basis points in2001, primarily due to the fact that 2000 included costs associated with the integration and relaunch of Eatons.

Sears Canada depreciation and amortization increased by $23 million, or 38.3%, due to the additional Eatonsstores. Interest expense was relatively flat with the prior year.

Sears Canada operating income declined by $38 million, or 31.1%, primarily due to pressures on margins causedby the very competitive promotional environment.

OUTLOOK

The Company's preliminary outlook for the full year of 2003 is for a comparable earnings per share percentageincrease in the low- to mid-single digits. This outlook for 2003 results from the assumptions that there will belimited change in the current economic environment, including a cautious consumer, only modest overall retailsector growth, slight increase in unemployment and a continued intense competitive environment. It is likely,however, that first quarter earnings will decline from 2002 levels due to the expected decrease in credit income andthe effect of a later Easter holiday selling season on retail results. The Retail and Related Services segment isexpected to grow operating income in the mid-teens as the Company continues to revitalize the Full-line Stores. This improvement, however, is expected to be somewhat offset by a mid-single digit decline in Credit andFinancial Products. Sears Canada is expected to continue to post increased year-over-year profitability and theCorporate and Other segment is anticipated to remain relatively flat with productivity savings being offset byhigher benefit and insurance costs.

ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION

Net cash used in operating activities was $0.5 billion as compared to net cash provided by operating activities of$2.3 billion and $2.7 billion in 2001 and 2000, respectively. The cash used in 2002 resulted from the growth of the

31

credit card receivables portfolio. Investments in credit card receivables are reported as reductions of operatingcash flows in the Company's financial statements. During 2002, the Company invested $2.6 billion in credit cardreceivables.

As of December 28, 2002, the Company's current assets exceeded current liabilities by $21.4 billion. This workingcapital surplus primarily results from the $32.6 billion of credit card receivables outstanding at the end of the year.The liquidity of these assets provides significant financial capacity and flexibility to access multiple sources ofcapital.

Net cash used in investment activities during 2002 was $2.3 billion. This compares with cash used in investmentactivities of $1.1 billion and $1.0 billion in 2001 and 2000, respectively. The increase in cash used for investmentactivities in 2002 as compared with the prior years is the result of the $1.8 billion acquisition of Lands' End,partially offset by proceeds from the disposition of holdings in Advance Auto Parts.

The Company has an ongoing capital expenditure program to renovate and update its Full-line Stores. In addition,the Company has added Full-line and Specialty Stores. Total capital expenditures for property, plant andequipment for the past three years were as follows:

millions 2002 2001 2000

Full-line Stores, primarily remodeling and expansion efforts $ 636 $ 531 $ 428Specialty Stores 113 318 198Other domestic - distribution/support 169 191 205Sears Canada 117 86 253Total capital expenditures $ 1,035 $ 1,126 $ 1,084

The Company plans capital expenditures of $1.1 billion for 2003. The 2003 domestic capital plan contemplatesthe opening of four Full-line Stores, one The Great Indoors store and a new off-mall Full-line Store as well as theremodeling of approximately 60 Full-line Stores. In addition, the 2003 domestic capital plan includes continuedinvestment in strategic efforts such as the continued roll-out of Lands' End in the Full-line Stores. The Companymay also from time to time consider selective transactions to create value and improve performance, which mayinclude acquisitions, dispositions, restructurings, joint ventures and partnerships.

Financing Activities

The Company's financing activities include net borrowings, dividend payments and share issuances andrepurchases. Net cash provided by financing activities totaled $3.7 billion in 2002, as compared to net cash used infinancing activities of $1.0 billion and $1.5 billion in 2001 and 2000, respectively.

The Company's total debt balances as of year-end were as follows:

millions 2002 % of Total 2001 % of Total

Short-term borrowings $ 4,525 15.1% $ 3,557 13.8%Long-term debt (1) 25,503 84.9% 22,197 86.2%

Total borrowings $ 30,028 100.0 % $ 25,754 100.0%

SFAS 133 hedge accounting adjustment 609 (119)

Total debt $ 30,637 $ 25,635

(1) Includes capitalized lease obligations and current portion of long-term debt.

The increase in total borrowings of $4.3 billion reflects borrowings used to finance the Lands' End acquisition of

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approximately $1.8 billion and borrowings used to finance domestic credit card receivables growth ofapproximately $2.6 billion (based on the Company's assumed 9 to 1 debt to equity ratio for the Credit andFinancial Products segment).

The Company uses interest rate derivatives to synthetically convert fixed rate debt to variable rate debt. Theinterest rate derivatives qualify as fair value hedges in accordance with SFAS No. 133 "Accounting for DerivativeInstruments and Hedging Activities", and as such are recorded on the balance sheet at market value with anoffsetting entry to the underlying hedged item, which is debt. Due to declining interest rates in 2002, the marketvaluation increased favorably by $0.7 billion.

The Company utilizes wholly-owned financing subsidiaries to execute its financing activities. Sears RoebuckAcceptance Corp. ("SRAC") issues commercial paper, maintains medium-term note programs and issuesintermediate and long-term underwritten debt. SRFG, Inc. ("SRFG"), along with other subsidiaries, securitizedomestic credit card receivables to access cost-effective funding.

On December 28, 2002, the Company had $4.5 billion of short-term borrowings outstanding as follows:

� SRAC unsecured commercial paper of $2.9 billion. As of December 28, 2002, SRAC commercialpaper was supported by a $4.4 billion syndicated credit agreement which was replaced with a $3.5billion facility on February 24, 2003;

� $1.5 billion through SRFG's asset-backed commercial paper obtained through multiple conduitarrangements. This program, with total access to $3.2 billion, had an original expiration date inMarch 2003. $2.8 billion of this program was renewed on February 28, 2003, with an expiration inFebruary 2004; and

� Sears Canada commercial paper of $0.1 billion which was supported by a $0.5 billion creditagreement due to expire in November 2003.

The Company's total long-term debt increased $3.3 billion in 2002, from $22.2 billion at December 29, 2001 to$25.5 billion at December 28, 2002. During 2002, the Company issued the following long-term debt:

� $1.9 billion of discrete underwritten notes with a weighted-average coupon of 6.90% and a weighted-average term of 24.9 years;

� $0.3 billion of fixed-rate medium-term notes with a weighted-average coupon of 6.69% and aweighted-average term of 6.4 years; and

� $4.4 billion of floating-rate term securitizations. As of December 28, 2002, $22.9 billion of domesticcredit card receivables included on the balance sheet were segregated in master trusts related to itssecuritization activities.

During 2002, the Company repaid $3.3 billion of previously issued long-term debt.

Under the Company's ongoing stock repurchase program, the Company repurchased common stock with a value of$0.4 billion in 2002, $0.6 billion in 2001 and $1.2 billion in 2000. At December 28, 2002, there was $1.25 billionremaining on the Company's authorized share repurchase program. Cash dividends paid remained constant at $0.3billion for 2002, 2001 and 2000, respectively.

Liquidity

The Company's principal sources of liquidity are operating cash flows and various capital market borrowings. The

33

Company has financial capacity and flexibility due to its access to the capital markets and the quality and liquidity ofits assets, principally its credit card receivables. This access to capital markets also allows the Company to effectivelymanage liquidity and interest rate risk. Liquidity risk is the measure of the Company's ability to fund maturities andprovide for the operating needs of its businesses. Interest rate risk is the effect on net income from changes in interestrates. The Company's policy is to manage interest rate risk through the strategic use of fixed and variable rate debt andinterest rate derivatives. The Company does not use derivatives for trading purposes. The Company's cost of funds isaffected by a variety of general economic conditions, including overall interest rate environment, as well as theCompany's debt ratings and fluctuations of its credit spread over applicable reference rates.

The Company accesses a variety of capital markets to diversify its funding sources, which increases its fundingflexibility. Capital market borrowings are used primarily to support the Company's Credit business. Ongoingaccess to the capital markets is critical to the Credit business and the Company regularly reviews a range ofstrategic alternatives for addressing funding needs. Due to current economic and geopolitical uncertainties andmarket conditions, the Company could face interruptions in systematically accessing the public debt markets. However, the Company believes it has a sufficient range of alternatives to obtain the financing necessary tomaintain its current level of operations, capital expenditures and dividends should such interruptions occur. As ofDecember 28, 2002, the following were available to the Company:

� Cash and marketable securities of $2.0 billion;

� An asset-backed commercial paper conduit program with access up to $3.2 billion and an originalexpiration date in March 2003. $2.8 billion of this program was renewed on February 28, 2003, withan expiration date of February 2004;

� A $4.4 billion syndicated credit facility in support of the unsecured commercial paper program withan expiration date in April 2003. This program was replaced on February 24, 2003 with anunsecured, 364-day revolving credit facility in the amount of $3.5 billion. The new facility includesthe option to extend the repayment of borrowings, if any, to February 2005; and

� A $0.5 billion committed credit facility for Sears Canada due to expire in November 2003.

The Company's total long-term debt of $25.5 billion is due to be repaid as follows: $4.8 billion in 2003; $3.2billion in 2004; $4.0 billion in 2005; $2.6 billion in 2006 and $10.8 billion thereafter. The Company has notidentified any reasonably possible circumstances that would trigger any early payment or acceleration provisions inthe debt portfolio. Debt obligations due to mature in the next year are expected to be satisfied with a combinationof short-term borrowings, new long-term debt issuances and operating cash flows.

The Company issued, from December 29, 2002 through March 7, 2003, $1.6 billion of long-term debt, consistingof $452 million of medium-term notes sold to institutional investors, $905 million of medium-term notes sold toretail investors and a $250 million discrete underwritten note.

The ratings of the Company's domestic debt securities as of February 28, 2003, appear in the table below:

Standard &Poor's Ratings

ServicesFitch

Ratings

Moody'sInvestorsService

Unsecured long-term debt BBB+ BBB+ Baa1 Unsecured commercial paper A-2 F-2 P-2 Term securitization AAA AAA Aaa

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Contractual Obligations and Commercial Commitments

To facilitate an understanding of the Company's contractual obligations and commercial commitments, thefollowing data is provided:

millions Payments Due by Period

TotalWithin1 Year 2-3 Years 4-5 Years

After5 Years

Contractual ObligationsLong-Term Debt (1) $ 25,107 $ 4,785 $ 7,177 $ 4,245 $ 8,900Short-Term Debt 4,525 4,525 -- -- --Capital Lease Obligations 458 23 43 39 353Operating Leases 2,293 335 540 372 1,046

Total Contractual Cash Obligations $ 32,383 $ 9,668 $ 7,760 $ 4,656 $ 10,299

(1) Excludes $62 million of premium/discount on long-term debt.

Amount of Commitment Expiration Per Periodmillions Total

AmountsCommitted

Within1 Year 2-3 Years 4-5 Years

After5 Years

Other Commercial CommitmentsStandby Letters of Credit $ 340 $ 308 $ 1 $ 1 $ 30Guarantees 84 17 34 33 --Import Letters of Credit 146 146 -- -- --

Total Commercial Commitments $ 570 $ 471 $ 35 $ 34 $ 30

As of December 28, 2002, the Company had domestic unused lines of credit of approximately $294 billioncommitted to its credit card customers. While this amount represented the remaining available lines of credit tocustomers, the Company has not experienced, and does not anticipate, that all of its customers will exercise theirentire available lines of credit at any given time. The Company generally has the right to increase, reduce, cancel,alter or amend the terms of these available lines of credit at any time.

ACCOUNTING POLICIES

Adoption of New Accounting Standards

As is more completely disclosed in Note 17 of the Notes to Consolidated Financial Statements, the Companyadopted SFAS No. 142, "Goodwill and Other Intangible Assets", in 2002. Upon adoption of SFAS No. 142,goodwill amortization ceased. Intangible assets as of the date of adoption were evaluated to determine if they havefinite or indefinite useful lives. Intangible assets determined to have finite lives are amortized over those lives, andintangible assets that have indefinite useful lives are not amortized. Goodwill and intangible assets with anindefinite useful life are now subject to a fair-value based impairment test performed, at a minimum, on an annualbasis. In addition, a transitional goodwill impairment test was required as of the adoption date.

Upon adoption of SFAS No. 142, a $208 million charge, net of tax and minority interest, was recognized in thefirst quarter of 2002 to record the impairment of certain goodwill, primarily related to NTB and Orchard Supply

35

Hardware, as well as the removal of negative goodwill related to Sears Canada, and was classified as a cumulativeeffect of a change in accounting principle. SFAS No. 142 does not permit the restatement of previously issuedfinancial statements, but does require the disclosure of prior results adjusted to exclude amortization expenserelated to goodwill and intangible assets that are no longer being amortized. Earnings per share for 2001 and 2000,adjusted to exclude amounts no longer being amortized under the provisions of SFAS No. 142, were $2.26 and$3.91, respectively.

Critical Accounting Policies

The preparation of financial statements requires the Company to estimate the effect of various matters that areinherently uncertain as of the date of the financial statements. Each of these required estimates varies in regard tothe level of judgment involved and its potential impact on the Company's reported financial results. Estimates aredeemed critical when a different estimate could have reasonably been used or where changes in the estimate arereasonably likely to occur from period to period, and would materially impact the Company's financial condition,changes in financial condition or results of operations. The Company's significant accounting policies arediscussed in Note 1 of the Notes to Consolidated Financial Statements; critical estimates inherent in theseaccounting policies are discussed in the following paragraphs.

Allowance for uncollectible accounts

The Company records an allowance for uncollectible accounts to reflect management's best estimate of lossesinherent in its portfolio of credit card receivables as of the balance sheet date. This allowance is establishedthrough a charge to the provision and represents amounts of current and past due credit card receivable balances(principal, finance charge and credit card fee balances) which management estimates will not be collected. TheCompany calculates the allowance for uncollectible accounts using a model that considers the current condition ofthe portfolio and factors such as bankruptcy filings, historical charge-off patterns, recovery rates and otherportfolio data. The Company's calculation is then reviewed by management to assess whether, based on economicevents, additional analyses are required to appropriately estimate losses inherent in the portfolio. Managementbelieves that the allowance for uncollectible accounts is adequate to cover anticipated losses in the reported creditcard receivable portfolio under current conditions; however, significant deterioration in any of the above-notedfactors, or in the overall health of the economy, could materially change these expectations.

Inventory valuation

Approximately 89% of merchandise inventories are valued at the lower of cost or market, with cost determinedusing the retail inventory method ("RIM") under the last-in, first-out ("LIFO") cost flow assumption. Inherent inthe RIM calculation are certain significant management judgments and estimates including, among others,merchandise markon, markups, markdowns and shrinkage, which significantly impact the ending inventoryvaluation at cost as well as resulting gross margins. The methodologies utilized by the Company in its applicationof the RIM are consistent for all periods presented. Such methodologies include the development of the cost-to-retail ratios, the groupings of homogenous classes of merchandise, the development of shrinkage reserves, theaccounting for price changes and the computations inherent in the LIFO adjustment. Management believes that theCompany's RIM and application of LIFO provides an inventory valuation which reasonably approximates costusing a last in, first out assumption and results in carrying inventory at the lower of cost or market.

Revenue recognition

In-store revenues from merchandise sales and services, including delivery fees, are reported net of estimated returnsand allowances and are recognized when the related goods are shipped and all significant obligations of the Companyhave been satisfied. The reserve for returns and allowances is calculated as a percentage of sales based on historicalreturn percentages. Commissions earned on sales made by licensed businesses are also included as a component ofmerchandise sales and services.

36

During 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") Issue 01-9, "AccountingFor Consideration Given By A Vendor to A Customer". This EITF statement established requirements for therecognition, measurement and display of certain sales incentives and impacted the Company's presentation of rebatesprovided to customers. As a result of adopting EITF Issue 01-9, net sales and cost of sales decreased by $88 million in2002 and $89 million in each 2001 and 2000.

The Company direct markets merchandise through catalogs and online via websites. Revenue is recognized forthese items when the merchandise is delivered to a customer unless the terms of the sale are FOB shipping point, inwhich the revenue is recognized upon shipment. The Company also direct markets insurance (credit protection,life and health) and clubs and services memberships. Deferred revenue is recorded when the member is billed(upon expiration of any free trial period), and revenue is recognized over the insurance or membership period. Membership revenue associated with clubs and service memberships is recognized on a straight-line basis.

Revenues from product installation and repair services are recognized as the services are provided. Additionally, theCompany sells extended service contracts with terms of coverage between 12 and 60 months. Revenues from the saleof these contracts are deferred and amortized over the lives of the contracts while the service costs are expensed asincurred. Incremental costs directly related to the acquisition of such contracts are deferred and charged to expense inproportion to the revenue recognized.

The Company recognizes finance charges and fee income on credit card receivables according to the contractualprovisions of the credit agreements and is recorded until an account is charged off, at which time uncollected financecharge and fee revenue are recorded as a reduction of credit revenues.

Vendor allowances

The Company receives allowances from its vendors through a variety of programs and arrangements, includingco-operative advertising and markdown reimbursement programs. Given the promotional nature of the Company'sbusiness, the allowances are generally intended to offset the Company's costs of promoting, advertising and selling thevendors' products in its stores. Vendor allowances are recognized as a reduction of cost of goods sold or relatedselling expense when the purpose for which the vendor funds were intended to be used has been fulfilled. Co-operative advertising allowances are reported as a reduction of advertising expense in the period in which theadvertising occurred. Markdown reimbursements are credited to cost of goods sold during the period in which therelated promotional markdown was taken. Accordingly, a reduction or increase in vendor allowances has an inverseimpact on cost of sales and/or selling and administrative expenses.

The FASB's EITF Issue 02-16, "Accounting By A Customer (Including A Reseller) For Cash Consideration ReceivedFrom A Vendor" addressed the accounting treatment for vendor allowances. The Company has not completed theprocess of evaluating the impact of EITF Issue 02-16, however, the Company does not expect that its adoption in 2003will have a material impact on its financial position or results of operations.

Self-insurance reserves

The Company purchases third-party insurance for workers' compensation, automobile, product and general liabilityclaims that exceed a certain level. However, the Company is responsible for the payment of claims under theseinsured limits. In estimating the obligation associated with incurred losses, the Company utilizes loss developmentfactors prepared by independent third-party actuaries. These development factors utilize historical data to project thefuture development of incurred losses. Loss estimates are adjusted based upon actual claims settlements and reportedclaims.

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Defined benefit retirement plans

The plan obligations and related assets of defined benefit retirement plans are presented in Note 10 of the Notes toConsolidated Financial Statements. Plan assets, which consist primarily of marketable equity and debt instruments, arevalued using market quotations. Plan obligations and the annual pension expense are determined by independentactuaries and through the use of a number of assumptions. Key assumptions in measuring the plan obligations includethe discount rate, the rate of salary increases and the estimated future return on plan assets. In determining thediscount rate, the Company utilizes the yield on high-quality, fixed-income investments currently available withmaturities corresponding to the anticipated timing of the benefit payments. Salary increase assumptions are basedupon historical experience and anticipated future management actions. Asset returns are based upon the anticipatedaverage rate of earnings expected on the invested funds of the plans. At December 28, 2002, the weighted-averageactuarial assumption of the Company's domestic plans were: discount rate 7%; long-term rate of return on plan assets9.0%; and assumed salary increases 4.25%.

The Company has made certain other estimates that, while not involving the same degree of judgment, are important tounderstanding the Company's financial statements. These estimates are in the areas of assessing recoverability of long-lived assets (including intangible assets), and in establishing reserves in connection with restructuring initiatives andother special charges. On an ongoing basis, management evaluates its estimates and judgments in these areas based onits substantial historical experience and other relevant factors. Management's estimates as of the date of the financialstatements reflect its best judgment giving consideration to all currently available facts and circumstances. As such,these estimates may require adjustment in the future, as additional facts become known or as circumstances change.

The Company's management has discussed the development and selection of these critical accounting policies withthe Audit Committee of the Company's Board of Directors and the Audit Committee has reviewed the Company'sdisclosure relating to it in this Management Discussion and Analysis.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements made in this Annual Report on Form 10-K and in other public announcements by the Company,including in the Chairman's letter accompanying the report, are "forward-looking statements" that are subject torisks and uncertainties that may cause the Company's actual results, performance or achievements to be materiallydifferent from any future results, performance or achievements expressed or implied by these forward-lookingstatements. Forward-looking statements include information concerning the Company's future financialperformance, business strategy, plans, goals and objectives. Statements preceded by, followed by or that otherwiseinclude the words "believes", "expects", "anticipates", "intends", "estimates", "plans", "forecasts", "is likely to","projected" and similar expressions or future or conditional verbs such as "will", "should", "would", "may" and"could" are generally forward-looking in nature and not historical facts.

Following are some of the risks and uncertainties that could affect our financial condition or results of operations,and could cause actual results, performance or achievements to differ from the future results, performance orachievements expressed or implied by these forward-looking statements: competitive conditions in the retail andcredit card businesses; changes in consumer confidence and spending; delinquency and charge-off trends in thecredit card receivables portfolio; consumer debt levels and the level of consumer bankruptcies; the success ofinitiatives to address increased delinquencies and credit losses and improve profitability in the MasterCardportfolio; the success of the Full-line Store strategy and other strategies; the possibility that the Company willidentify new business and strategic options for one or more of its business segments, potentially including selectiveacquisitions, dispositions, restructurings, joint ventures and partnerships; the Company's ability to integrate andoperate Lands' End successfully; the outcome of pending legal proceedings; anticipated cash flow; social andpolitical conditions such as war, political unrest and terrorism or natural disasters; the possibility of negativeinvestment returns in the Company's pension plan; changes in interest rates; the volatility in financial markets;changes in the Company's debt ratings, credit spreads and cost of funds; the possibility of interruptions in

38

systematically accessing the public debt markets; general economic conditions and normal business uncertainty. Inaddition, Sears typically earns a disproportionate share of its operating income in the fourth quarter due to seasonalbuying patterns, which are difficult to forecast with certainty. Additional discussion of these and other risks anduncertainties is contained elsewhere under "Management's Discussion and Analysis" and "Quantitative andQualitative Disclosures About Market Risk."

While the Company believes that its forecasts and assumptions are reasonable, it cautions that actual results maydiffer materially. The Company intends the forward-looking statements to speak only as of the time first made anddoes not undertake to update or revise them as more information becomes available.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

The primary market risk exposure faced by the Company is interest rate risk which arises from the Company's debtobligations, credit card assets and derivative financial instruments. The Company's policy is to manage interest raterisk through the use of fixed and variable rate debt and interest rate derivatives. All debt securities and derivativeinstruments are considered non-trading.

At year-end 2002 and 2001, 83% and 85%, respectively, of the Company's funding portfolio was variable rate(including current maturities of fixed rate long-term debt that will reprice in the next 12 months and fixed rate debtsynthetically converted to variable rate through the use of derivative financial instruments). Based on the size of theCompany's variable rate funding portfolio at year-end 2002 and 2001, which totaled $24.8 billion and $21.8billion, respectively, an immediate 100 basis point change in interest rates would have affected pretax fundingcosts by approximately $248 million and $218 million in 2002 and 2001, respectively. These estimates assumethat the funding portfolio remains constant for an annual period and the interest rate change occurs at the beginningof the period. These estimates also do not take into account the effect on net interest margin of changes in revenueresulting from either changes in terms of the assets or in the index applicable to the variable rate receivables.

The objective of variable rate funding is to reduce net interest margin risk by better aligning the Company's fundingwith its credit card assets. However, the Company is exposed to basis risk on any differences in the variable rate onthe Company's debt, primarily LIBOR-based, and the prime-based variable rate finance charge on the Company'scredit card portfolio. The Company's level of variable rate funding is in response to the growth of the variable ratereceivables within the Company's domestic credit card portfolio (primarily the MasterCard product) and theCompany's conversion of the Sears Card finance charges from fixed rate to variable rate in July 2002. The Company'sability to increase the finance charge yield of its variable rate credit card assets may be limited at some point bycompetitive conditions.

The Company actively manages the risk of nonpayment by its derivative counterparties by limiting its exposure toindividual counterparties based on credit ratings, value at risk and maturities. The counterparties to theseinstruments are major financial institutions with credit ratings of single-A or better. In certain cases, counterpartyrisk is also managed through the use of collateral in the form of cash or U.S. government securities. The followingtable summarizes notional amounts, fair values and weighted-average remaining life of domestic derivativeinstruments:

Notional Amount(millions)

Fair Value(millions)

Weighted-AverageRemaining Life

(years)

$ 10,742 $ 690 3.5

No more than 18 percent of the notional amount of the derivatives portfolio was contracted with any one counterparty.

39

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements of the Company, including the notes to all such statements, and otherinformation are included in this report beginning on page F-1.

Item 9. Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure

None

PART III

Item 10. Directors and Executive Officers of the Registrant

Information regarding directors and executive officers of Sears is incorporated herein by reference to the descriptionsunder "Item 1: Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the 2003Proxy Statement and to Item 1A of this Report under the caption "Executive Officers of the Registrant".

Item 11. Executive Compensation

Information regarding executive compensation is incorporated by reference to the material under the captions "Item 1:Election of Directors," "Directors' Compensation and Benefits", "Executive Compensation", "Stock Options", "Long-Term Performance Incentive Program", "Pension Plan", "Officers' Agreements" and "Compensation CommitteeInterlocks and Insider Participation" of the 2003 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information regarding security ownership of certain beneficial owners and management is incorporated herein byreference to the material under the heading "Beneficial Ownership" of the 2003 Proxy Statement.

See also Part II, Item 5 for a discussion of securities authorized for issuance under equity compensation plans.

Item 13. Certain Relationships and Related Transactions

Information regarding certain relationships and related transactions is incorporated herein by reference to the materialunder the heading "Certain Transactions" of the 2003 Proxy Statement.

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Item 14. Disclosure Controls and Procedures

The Company's management, including Alan J. Lacy, Chairman of the Board of Directors, President and ChiefExecutive Officer (principal executive officer) and Glenn R. Richter, Senior Vice President and Chief FinancialOfficer (principal financial officer), have evaluated the effectiveness of the Company's "disclosure controls andprocedures", as such term is defined in Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Actof 1934, as amended, within 90 days of the filing date of this Annual Report on Form 10-K. Based upon theirevaluation, the principal executive officer and principal financial officer concluded that the Company's disclosurecontrols and procedures are effective. There were no significant changes in the Company's internal controls or inother factors that could significantly affect these controls, since the date the controls were evaluated.

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)1 and 2 - An "Index to Financial Statements and Financial Statement Schedules" has been filed as a part of this Report beginning on page F-1 hereof.

(a)3 - Exhibits:

An "Exhibit Index" has been filed as a part of this Report beginning on page E-1 hereof and isincorporated herein by reference.

(b) -Reports on Form 8-K:

A Current Report on Form 8-K dated October 4, 2002 was filed with the Securities and Exchange Commissionon October 4, 2002 to report, the filing of a press release concerning organizational changes.

A Current Report on Form 8-K dated October 7, 2002 was filed with the Securities and Exchange Commissionon October 7, 2002 to report, the filing of a press release concerning the outlook for the Registrant.

A Current Report on Form 8-K dated October 17, 2002 was filed with the Securities and Exchange Commissionon October 18, 2002 to report, the release of third quarter earnings of the Registrant.

41

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SEARS, ROEBUCK AND CO. (Registrant)

*Thomas E. Bergmann By: Thomas E. Bergmann Vice President and Controller

March 12, 2003

Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated.

Signature Title Date

*Alan J. LacyAlan J. Lacy

Chairman of the Board of Directors,President and Chief Executive Officer

)))

*Glenn R. RichterGlenn R. Richter

Senior Vice President and ChiefFinancial Officer (Principal FinancialOfficer)

))))

*Thomas E. BergmannThomas E. Bergmann

Vice President and Controller (PrincipalAccounting Officer)

)))) March 12, 2003

*Hall Adams, Jr. Hall Adams, Jr.

Director ))))

*Brenda C. BarnesBrenda C. Barnes

Director ))))

*James R. CantalupoJames R. Cantalupo

Director ))))

42

Signature Title Date

*Donald J. CartyDonald J. Carty

Director ))))

*W. James FarrellW. James Farrell

Director ))))

March 12, 2003

*Michael A. Miles Michael A. Miles

Director ))))

*Hugh B. Price Hugh B. Price

Director ))))

*Raul Yzaguirre Raul Yzaguirre

Director ))))

*By: /s/Thomas E. Bergmann Individually and as Attorney-in-fact Thomas E. Bergmann

43

CERTIFICATIONS

I, Alan J. Lacy, Chairman of the Board of Directors and Chief Executive Officer of Sears, Roebuck and Co., certifythat:

1. I have reviewed this annual report on Form 10-K of Sears, Roebuck and Co.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annualreport, fairly present in all material respects the financial condition, results of operations and cash flows ofthe registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

(a) Designed such disclosure controls and procedures to ensure that material information relating tothe registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this annual report is being prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a datewithin 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

(c) Presented in this annual report our conclusions about the effectiveness of the disclosure controlsand procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to theregistrant's auditors and the Audit Committee of registrant's Board of Directors (or persons performing theequivalent functions):

(a) All significant deficiencies in the design or operation of internal controls which could adverselyaffect the registrant's ability to record, process, summarize and report financial data and haveidentified for the registrant's auditors any material weaknesses in internal controls; and

(b) Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this annual report whether there weresignificant changes in internal controls or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

Date: March 12, 2003By: /s/ Alan J. Lacy

Alan J. LacyChairman of the Board of Directors,President and Chief Executive Officer

44

I, Glenn R. Richter, Senior Vice President and Chief Financial Officer of Sears, Roebuck and Co., certify that:

1. I have reviewed this annual report on Form 10-K of Sears, Roebuck and Co.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annualreport, fairly present in all material respects the financial condition, results of operations and cash flows ofthe registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

(a) Designed such disclosure controls and procedures to ensure that material information relating tothe registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this annual report is being prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a datewithin 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

(c) Presented in this annual report our conclusions about the effectiveness of the disclosure controlsand procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to theregistrant's auditors and the Audit Committee of registrant's Board of Directors (or persons performing theequivalent functions):

(a) All significant deficiencies in the design or operation of internal controls which could adverselyaffect the registrant's ability to record, process, summarize and report financial data and haveidentified for the registrant's auditors any material weaknesses in internal controls; and

(b) Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this annual report whether there weresignificant changes in internal controls or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

Date: March 12, 2003

By: /s/ Glenn R. Richter Glenn R. Richter,Senior Vice Presidentand Chief Financial Officer

1

SEARS, ROEBUCK AND CO.INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

Year Ended December 28, 2002

Page

Management's Report F-2

Independent Auditors' Report F-3

Consolidated Statements of Income F-4

Consolidated Balance Sheets F-5

Consolidated Statements of Cash Flows F-6

Consolidated Statements of Shareholders' Equity F-7

Notes to Consolidated Financial Statements F-8

Schedule II – Valuation and Qualifying Accounts F-38

F -

2

Management's Report

The financial statements, financial analyses and all other information were prepared by management, which isresponsible for their integrity and objectivity. Management believes the financial statements, which require the useof certain estimates and judgments, fairly and accurately reflect the financial position and operating results ofSears, Roebuck and Co. ("the Company") in accordance with accounting principles generally accepted in theUnited States of America. All financial information is consistent with the financial statements.

Management maintains a system of internal controls that it believes provides reasonable assurance that, in allmaterial respects, assets are maintained and accounted for in accordance with management's authorizations,transactions are recorded accurately in the books and records, and are appropriately reported and disclosed in theCompany's financial statements. The concept of reasonable assurance is based on the premise that the cost ofinternal controls should not exceed the benefits derived. To assure the effectiveness of the internal control system,the organizational structure provides for defined lines of responsibility and delegation of authority. The Company'sformally stated and communicated policies demand of employees high ethical standards in their conduct of itsbusiness. These policies address, among other things, potential conflicts of interest; compliance with all domesticand foreign laws, including those related to financial disclosure; and the confidentiality of proprietary information.As a further enhancement of the above, the Company's comprehensive internal audit program is designed forcontinual evaluation of the adequacy and effectiveness of its internal controls and measures adherence toestablished policies and procedures.

Deloitte & Touche LLP, independent certified public accountants, have audited the financial statements of theCompany, and their report is presented on the following page. Their audit also includes gaining an understandingof the Company's control environment, accounting systems and control procedures to the extent necessary to planand execute the audit. The independent accountants and internal auditors advise management of the results of theiraudits, and make recommendations to improve the system of internal controls. Management evaluates the auditrecommendations and takes appropriate action.

The Audit Committee of the Board of Directors is comprised entirely of directors who are not employees of theCompany. The committee reviews audit plans, internal control reports, financial reports and related matters andmeets regularly with the Company's management, internal auditors and independent accountants. The independentaccountants and the internal auditors advise the committee of any significant matters resulting from their audits andhave free access to the committee without management being present.

/s/ Alan J. Lacy Alan J. LacyChairman of the Board of Directors, President and Chief Executive Officer

/s/ Glenn R. Richter Glenn R. RichterSenior Vice President and Chief Financial Officer

/s/ Thomas E. Bergmann Thomas E. BergmannVice President and Controller

F -

3

Independent Auditors' Report

To the Board of Directors and Shareholders ofSears, Roebuck and Co.

We have audited the accompanying Consolidated Balance Sheets of Sears, Roebuck and Co. as of December 28,2002 and December 29, 2001, and the related Consolidated Statements of Income, Shareholders' Equity, and CashFlows for each of the three years in the period ended December 28, 2002. Our audits also included the financialstatement schedule of Sears, Roebuck and Co., listed on page F-1. These financial statements and financialstatement schedule are the responsibility of the Company's management. Our responsibility is to express anopinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position ofSears, Roebuck and Co. as of December 28, 2002 and December 29, 2001, and the results of its operations and itscash flows for each of the three years in the period ended December 28, 2002, in conformity with accountingprinciples generally accepted in the United States of America. Also, in our opinion, such financial statement schedule,when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

As discussed in Notes 3, 6 and 17 to the consolidated financial statements, the Company changed its method ofaccounting for goodwill in 2002 and its methods of accounting for credit card securitizations, derivativeinstruments and hedging activities in 2001, as required by new accounting standards.

/s/ DELOITTE & TOUCHE LLPDeloitte & Touche LLP

Chicago, IllinoisFebruary 28, 2003

F -

4

SEARS, ROEBUCK AND CO.Consolidated Statements of Income

millions, except per common share data 2002 2001 2000

REVENUESMerchandise sales and services $ 35,698 $ 35,755 $ 36,277Credit and financial products revenues 5,668 5,235 4,571 Total revenues 41,366 40,990 40,848

COSTS AND EXPENSESCost of sales, buying and occupancy 25,646 26,234 26,632Selling and administrative 9,249 8,892 8,807Provision for uncollectible accounts 2,261 1,866 884Depreciation and amortization 875 863 839Interest 1,143 1,415 1,248Special charges and impairments 111 542 251 Total costs and expenses 39,285 39,812 38,661Operating income 2,081 1,178 2,187Other income, net 372 45 36

Income before income taxes, minority interest and cumulative effect of change in accounting principle 2,453 1,223 2,223

Income taxes 858 467 831Minority interest 11 21 49Income before cumulative effect of change in accounting principle 1,584 735 1,343Cumulative effect of a change in accounting for goodwill (208) -- --NET INCOME $ 1,376 $ 735 $ 1,343

EARNINGS PER COMMON SHARE:BASIC Earnings per share before cumulative effect of change in accounting principle $ 4.99 $ 2.25 $ 3.89 Cumulative effect of change in accounting principle (0.65) -- -- Earnings per share $ 4.34 $ 2.25 $ 3.89DILUTED Earnings per share before cumulative effect of change in accounting principle $ 4.94 $ 2.24 $ 3.88 Cumulative effect of change in accounting principle (0.65) -- -- Earnings per share $ 4.29 $ 2.24 $ 3.88

See accompanying notes.

F -

5

SEARS, ROEBUCK AND CO.Consolidated Balance Sheets

millions, except per share data 2002 2001ASSETSCurrent assets Cash and cash equivalents $ 1,962 $ 1,064 Credit card receivables 32,595 29,321 Less allowance for uncollectible accounts 1,836 1,166 Net credit card receivables 30,759 28,155 Other receivables 863 658 Merchandise inventories 5,115 4,912 Prepaid expenses and deferred charges 535 458 Deferred income taxes 749 858 Total current assets 39,983 36,105

Property and equipment Land 442 434 Buildings and improvements 6,930 6,539 Furniture, fixtures and equipment 5,050 5,620 Capitalized leases 557 544 Gross property and equipment 12,979 13,137 Less accumulated depreciation 6,069 6,313 Total property and equipment, net 6,910 6,824

Deferred income taxes 734 415Goodwill 944 294Tradenames and other intangible assets 704 --Other assets 1,134 679 TOTAL ASSETS $ 50,409 $ 44,317

LIABILITIESCurrent liabilities Short-term borrowings $ 4,525 $ 3,557 Current portion of long-term debt and capitalized lease obligations 4,808 3,157 Accounts payable and other liabilities 7,485 7,176 Unearned revenues 1,199 1,136 Other taxes 580 558 Total current liabilities 18,597 15,584

Long-term debt and capitalized lease obligations 21,304 18,921Pension and postretirement benefits 2,491 2,417Minority interest and other liabilities 1,264 1,276 Total Liabilities 43,656 38,198

COMMITMENTS AND CONTINGENT LIABILITIES

SHAREHOLDERS' EQUITYCommon shares issued ($.75 par value per share, 1,000 shares authorized, 316.7 and 320.4 shares outstanding, respectively) 323 323Capital in excess of par value 3,505 3,500Retained earnings 8,497 7,413Treasury stock - at cost (4,474) (4,223)Deferred ESOP expense (42) (63)Accumulated other comprehensive loss (1,056) (831) Total Shareholders' Equity 6,753 6,119 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 50,409 $ 44,317


F -

6

SEARS, ROEBUCK AND CO.Consolidated Statements of Cash Flows

millions 2002 2001 2000

CASH FLOWS FROM OPERATING ACTIVITIESNet income $ 1,376 $ 735 $ 1,343Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 875 863 839 Cumulative effect of change in accounting principle 208 -- -- Provision for uncollectible accounts 2,261 1,866 884 Special charges and impairments 111 542 265 Gain on sales of property and investments (347) (21) (19) Income tax benefit on nonqualified stock options 24 14 3 Change in (net of acquisitions): Deferred income taxes (203) (190) 62 Retained interest in transferred credit card receivables -- (759) 106 Credit card receivables (4,833) (810) (199) Merchandise inventories 45 610 (560) Other operating assets (56) 61 8 Other operating liabilities 34 (596) (47) Net cash (used in) provided by operating activities (505) 2,315 2,685

CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of businesses, net of cash acquired (1,840) -- (1)Proceeds from sales of property and investments 568 59 75Purchases of property and equipment (1,035) (1,126) (1,055)Purchases of long-term investments (15) (21) (40) Net cash used in investing activities (2,322) (1,088) (1,021)

CASH FLOWS FROM FINANCING ACTIVITIESProceeds from long-term debt 6,565 4,051 795Repayments of long-term debt (3,256) (3,532) (2,260)Increase (decrease) in short-term borrowings, primarily 90 days or less 964 (708) 1,295Repayments of ESOP note receivable 11 33 118Common shares repurchased (427) (625) (1,233)Common shares issued for employee stock plans 157 75 58Dividends paid to shareholders (293) (302) (322) Net cash provided by (used in) financing activities 3,721 (1,008) (1,549)Effect of exchange rate changes on cash and cash equivalents 4 3 (2)NET INCREASE IN CASH AND CASH EQUIVALENTS 898 222 113BALANCE AT BEGINNING OF YEAR 1,064 842 729

BALANCE AT END OF YEAR $ 1,962 $ 1,064 $ 842


F -

7

SEARS, ROEBUCK AND CO.Consolidated Statements of Shareholders' Equity

Dollars in millionsshares in thousands Common

SharesOutstanding

CommonStockIssued

Capital inExcess ofPar Value

RetainedEarnings

TreasuryStock

DeferredESOP

Expense

AccumulatedOther

Comprehen-sive Loss

TotalShare-

holders'Equity

Balance, beginning of year 2000 369,128 $ 323 $ 3,554 $ 5,952 $ (2,569) $ (134) $ (287) $ 6,839Net income 1,343 1,343Total other comprehensive income 38 38 Total comprehensive income 1,381Dividends to shareholders ($0.92 per share) (316) (316)Stock options exercised and other

changes 1,963 (16) 76 60Shares repurchased (37,888) (1,233) (1,233)ESOP expense recognized 38 38

Balance, end of year 2000 333,203 323 3,538 6,979 (3,726) (96) (249) 6,769

Net income 735 735Total other comprehensive income (582) (582) Total comprehensive income 153Dividends to shareholders ($0.92 per share) (301) (301)Stock options exercised and other changes 3,349 (38) 128 90Shares repurchased (16,106) (625) (625)ESOP expense recognized 33 33

Balance, end of year 2001 320,446 323 3,500 7,413 (4,223) (63) (831) 6,119

Net income 1,376 1,376Total other comprehensive loss (225) (225) Total comprehensive income 1,151Dividends to shareholders ($0.92 per share) (292) (292)Stock options exercised and other changes 4,517 5 176 181Shares repurchased (8,229) (427) (427)ESOP expense recognized 21 21

Balance, end of year 2002 316,734 $ 323 $ 3,505 $ 8,497 $ (4,474) $ (42) $ (1,056) $ 6,753


F -

SEARS, ROEBUCK AND CO.Notes to Consolidated Financial Statements

8

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Sears, Roebuck and Co. (together with its consolidated subsidiaries, the "Company") is a multi-line retailer thatoffers a wide array of merchandise and related services. In addition, through its Credit and Financial Productsbusinesses, the Company offers its customers various credit card and related insurance products. The Companyoperates principally in the United States, Puerto Rico and Canada.

Basis of Consolidation

The consolidated financial statements include the accounts of Sears, Roebuck and Co. and all majority-ownedsubsidiaries. Investments in companies in which the Company exercises significant influence, but not control, areaccounted for using the equity method of accounting. Investments in companies in which the Company has lessthan a 20% ownership interest, and does not exercise significant influence, are accounted for at cost. Allintercompany accounts and transactions have been eliminated during consolidation.

Fiscal Year

The Company's fiscal year ends on the Saturday nearest December 31. Unless otherwise stated, references to yearsin this report relate to fiscal years rather than to calendar years.

Fiscal year Ended Weeks

2002 December 28, 2002 522001 December 29, 2001 522000 December 30, 2000 52

Reclassifications

Certain reclassifications have been made to prior year financial statements and the notes to conform with thecurrent year presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements andreported amounts of revenues and expenses during the reporting period. Significant estimates are required as partof inventory valuation; determining the allowance for uncollectible accounts; depreciation; amortization andrecoverability of long-lived assets; establishing restructuring and other reserves; and calculating retirementbenefits. Actual results may differ from these estimates.

F -


9

Cash and Cash Equivalents

Cash equivalents include all highly liquid investments with original maturities of three months or less at the date ofpurchase.

Credit Card Receivables

Credit card receivables arise under revolving credit accounts used primarily to finance purchases. Sears Cardproducts are typically available only on purchases of merchandise and services offered by the Company, whereasMasterCard is widely accepted by merchants outside the Company. Additional MasterCard product receivables aregenerated from balance transfers and cash advances. These accounts have various billing and payment structures,including varying minimum payment levels and finance charge rates and fees. Based on historical paymentpatterns, the full receivable balance will not be repaid within one year.

Credit card receivables are shown net of an allowance for uncollectible accounts. The allowance is an estimate oflosses inherent in the portfolio (including current accounts, finance charges and credit card fee balances) as of thebalance sheet date. The Company calculates the allowance using a model that analyzes factors such as bankruptcyfilings, delinquency rates, historical charge-off patterns, recovery rates and other portfolio data. The Company'scalculation is then reviewed by management to assess whether, based on economic events, additional analyses arerequired to appropriately estimate losses inherent in the portfolio.

The entire balance of an account is contractually delinquent if the minimum payment is not received by thepayment due date. The Company's current credit processing system charges off an account automatically when acustomer's number of missed monthly payments outstanding reaches eight; however, accounts may be charged offsooner in the event of customer bankruptcy. Bankrupt customer accounts are charged off 60 days after the firstmeeting of the creditors for a filing under Chapter 7 of the U.S. Bankruptcy Code and 90 days after the firstmeeting of the creditors for a filing under Chapter 13 of the U.S. Bankruptcy Code. All amounts collected onpreviously charged off accounts are included in recoveries for the determination of net charge-offs.

Merchandise Inventories

Approximately 89% of merchandise inventories are valued at the lower of cost or market, with cost determinedusing the retail inventory method ("RIM") under the last-in, first-out ("LIFO") cost flow assumption. To estimatethe effects of inflation on inventories, the Company utilizes internally developed price indices.

The LIFO adjustment to cost of sales was a charge of $11 million in 2002, a charge of $25 million in 2001 and acredit of $29 million in 2000. If the first-in, first-out ("FIFO") method of inventory valuation had been usedinstead of the LIFO method, merchandise inventories would have been $602 and $591 million higher at December28, 2002 and December 29, 2001, respectively.

Inherent in the RIM calculation are certain significant management judgments and estimates including, amongothers, merchandise markons, markups, markdowns and shrinkage, which significantly impact the ending inventoryvaluation at cost as well as resulting gross margins. The methodologies utilized by the Company in its applicationof the RIM are consistent for all periods presented. Such methodologies include the development of the cost-to-retail ratios, the groupings of homogenous classes of merchandise, the development of shrinkage reserves, theaccounting for price changes and the computations inherent in the LIFO adjustment. Management believes that theCompany's RIM and application of LIFO provides an inventory valuation which reasonably approximates costusing a last-in, first-out assumption and results in carrying inventory at the lower of cost or market.

F -


10

Vendor Allowances

The Company receives allowances from its vendors through a variety of programs and arrangements, includingco-operative advertising and markdown reimbursement programs. Given the promotional nature of the Company'sbusiness, the allowances are generally intended to offset the Company's costs of promoting, advertising and sellingthe vendors' products in its stores. Vendor allowances are recognized as a reduction of cost of goods sold orrelated selling expense when the purpose for which the vendor funds were intended to be used has been fulfilled.Co-operative advertising allowances are reported as a reduction of advertising expense in the period in which theadvertising expenditures are incurred. Markdown reimbursements are credited to cost of goods sold during theperiod in which the related promotional markdown was taken. Accordingly, a reduction or increase in vendorallowances has an inverse impact on cost of sales and/or selling and administrative expenses.

Deferred Policy Acquisition Costs

For certain insurance products, policy acquisition costs are amortized for 5 to 15 years in proportion to incomeproduced. The consolidated balance sheets include deferred policy acquisition costs of $219 million and $191million at December 28, 2002 and December 29, 2001, respectively. The current portion is included in prepaidexpenses and deferred charges, while the long-term portion is included in other assets. Deferred policy acquisitioncosts are periodically reviewed for recoverability.

Tradenames and Other Identifiable Intangible Assets

The identifiable intangible assets of the Company are primarily tradenames acquired in business combinations. The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142,"Goodwill and Other Intangible Assets", at the beginning of 2002. Under the provisions of SFAS No. 142,identifiable intangibles with finite lives are amortized and those with indefinite lives are not amortized. Theestimated useful life of an identifiable intangible asset to the Company is based upon a number of factors includingthe effects of demand, competition and the level of maintenance expenditures required to obtain future cash flows. Prior to the start of 2002, the Company followed the provisions of Accounting Principles Board Opinion ("APB")No. 17, which required that all identifiable intangibles be amortized by systematic charges to income over theperiod expected to be benefited.

The Company tests identifiable intangible assets with an indefinite life for impairment, at a minimum on an annualbasis, relying on a number of factors including operating results, business plans and projected future cash flows. Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similarto that used to evaluate other long-lived assets. The impairment test for identifiable intangible assets not subject toamortization consists of a comparison of the fair value of the intangible asset with its carrying amount. Animpairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset.

Goodwill

Under the provisions of SFAS No. 142, goodwill is no longer amortized. Prior to the start of 2002, the Companyfollowed the provisions of APB Opinion No. 17, which required that goodwill be amortized by systematic chargesto income over the period expected to be benefited. That period ranged from 5 to 40 years.

Long-Lived Asset Recoverability

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", long-lived

F -F -F -


11

assets, primarily property and equipment, are tested for recoverability whenever events or changes in circumstancesindicate that its carrying amount may not be recoverable. The SFAS No. 144 impairment test is a two-step process.If the carrying value of the asset exceeds the expected future cash flows (undiscounted and without interest) fromthe asset, an impairment is indicated. The impairment loss recognized is the excess of the carrying value of theasset over its fair value.

Revenue Recognition

In-store revenues from merchandise sales and services, including delivery fees, are reported net of estimatedreturns and allowances and customer rebates, and are recognized when the related goods are shipped and allsignificant obligations of the Company have been satisfied. The reserve for returns and allowances is calculated asa percentage of sales based on historical return percentages. Commissions earned on sales made by licensedbusinesses are also included as a component of merchandise sales and services.

During 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") Issue 01-9,"Accounting For Consideration Given By A Vendor To A Customer". This EITF issue established requirementsfor the recognition, measurement and display of certain sales incentives and impacted the Company's presentationof rebates provided to customers. As a result of adopting EITF Issue 01-9, net sales and cost of sales decreased by$88 million in 2002 and $89 million in 2001 and 2000, respectively.

Revenues from product installation and repair services are recognized as the services are provided. Additionally,the Company sells extended service contracts with terms of coverage between 12 and 60 months. Revenues fromthe sale of these contracts are deferred and amortized over the lives of the contracts while the service costs areexpensed as incurred. Incremental costs directly related to the acquisition of such contracts are deferred andcharged to expense in proportion to the revenue recognized.

The Company direct markets merchandise through catalogs and online via websites. Revenue is recognized forthese items when the merchandise is delivered to a customer unless the terms of the sale are FOB shipping point, inwhich the revenue is recognized upon shipment. The Company also direct markets insurance (credit protection,life and health) and clubs and services memberships. Deferred revenue is recorded when the member is billed(upon expiration of any free trial period), and revenue is recognized over the insurance or membership period. Membership revenue associated with clubs and service memberships is recognized on a straight-line basis.

The Company is responsible for providing warranty coverage on certain hardline products. Based on historicalwarranty claims, the Company accrues the estimated costs of the warranty coverage at the time of sale. Arollforward of the warranty reserve is as follows:

millions 2002 2001

Beginning balance $ 114 $ 109Warranty expense 233 255Warranty claims (216) (250)Ending balance $ 131 $ 114

The Company recognizes finance charges and fee income on credit card receivables according to the contractualprovisions of the credit agreements, and such charges and income are recorded until an account is charged off, atwhich time uncollected finance charge and fee revenue are recorded as a reduction of credit revenues. TheCompany provides an allowance for estimated uncollectible finance charge and fee revenues in the provision.

F -F -


12

Cost of Sales, Buying and Occupancy Expenses

Cost of sales, buying and occupancy includes buying, warehousing, distribution and delivery and store occupancycosts related to the Company's retail store operations, service and installation costs associated with product repairservices businesses, and all shipping, handling and delivery costs associated with our online and direct-to-customerbusinesses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses primarily include payroll and related benefits, advertising and dataprocessing expenses.

Advertising and Direct Response Marketing

Costs for newspaper, television, radio and other media advertising are expensed the first time the advertisingoccurs. The total cost of advertising charged to selling, general and administrative expense was $1.8 billion in2002 and $1.6 billion in each of 2001 and 2000.

Certain direct response advertising and solicitation costs are capitalized. Membership acquisition and renewalcosts, which primarily relate to membership solicitations, are capitalized since such direct response advertisingcosts result in future economic benefits. Generally, such costs are amortized over the shorter of the program's lifeor five years, primarily in proportion to when revenues are recognized. For specialty catalogs, costs are amortizedover the life of the catalog, not to exceed one year. When the carrying amount of such deferred direct advertisingcosts exceed the estimated future net revenues realized from such advertising, any excess is recorded as advertisingexpense of the current period. The consolidated balance sheets include deferred direct response advertising costsof $58 million and $57 million at December 28, 2002 and December 29, 2001, respectively. The current portion isincluded in prepaid expenses and deferred charges, while the long-term portion is included in other assets.

Store Preopening Expenses

Non-capital costs associated with the opening of new stores are expensed as incurred.

Depreciation and Amortization

Depreciation and amortization is provided principally by the straight-line method over the estimated useful lives ofthe related assets, generally 2 to 10 years for furniture, fixtures and equipment, 15 to 50 years for buildings andbuilding improvements and 3 years for identifiable intangible assets with a definitive estimated useful life.

Earnings Per Common Share

Basic earnings per common share is computed by dividing net income available to common shareholders by theweighted-average number of common shares outstanding for the periods presented. Diluted earnings per commonshare also includes the dilutive effect of potential common shares (primarily dilutive stock options) outstandingduring the period for the periods presented.

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Stock-Based Compensation

At December 28, 2002, the Company has various stock-based employee compensation plans which are describedmore fully in Note 11. The Company accounts for those plans in accordance with APB No. 25, "Accounting ForStock Issued to Employees", and related Interpretations. No stock-based employee compensation cost is reflectedin net income, as no options granted under those plans had an exercise price less than the market value of theunderlying common stock on the date of grant. The following table illustrates the effect on net income andearnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accountingfor Stock-Based Compensation".

millions, except earnings per share 2002 2001 2000

Net income - as reported $ 1,376 $ 735 $ 1,343Less: Total stock-based employee compensation expense

determined under fair value based method for all awards, net of related taxes (49) (51) (43)

Net income - pro forma $ 1,327 $ 684 $ 1,300

Earnings per share - basic As reported $ 4.34 $ 2.25 $ 3.89 Pro forma 4.18 2.10 3.77Earnings per share - diluted As reported 4.29 2.24 3.88 Pro forma $ 4.14 $ 2.08 $ 3.75

Financial Instruments

The Company uses financial instruments primarily to manage its exposures to movements in interest rates. The useof interest rate derivatives lessens the exposure to this risk with the intent to reduce the risk or cost to theCompany. The Company does not use derivatives for trading purposes.

The Company formally documents its hedge relationships, including identification of the hedging instruments andthe hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. The Company also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives thatare used in hedging transactions are highly effective in offsetting changes in the fair value of the hedged item. If itis determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting.

The Company's interest rate derivatives are designated as fair value hedges of fixed rate borrowings, includingfixed rate borrowings that fund its credit card receivables, on the date the derivative is entered. A fair value hedgeis a hedge of a recognized asset or liability or an unrecognized firm commitment. For fair value hedges, both theeffective and ineffective portions of the changes in the fair value of the derivative, along with the offsetting gain orloss on the hedged item that is attributable to the hedged risk, are recorded in earnings and reported in theconsolidated statements of income in the same account as the hedged item.

Fair Value of Financial Instruments

Due to their short-term nature, the carrying value of the Company's cash and cash equivalents, credit card and otherreceivables and short-term borrowings approximate fair value. The fair value of long-term debt is disclosed inNote 5. The Company's derivative financial instruments are recorded on the balance sheet within other assets andother long-term liabilities at fair value. Fair value estimates for the Company's derivative and debt instruments arebased on market prices when available or are derived from financial valuation methodologies such as discountedcash flow analyses.

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Effect of Accounting Standards Not Yet Adopted

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities".This statement addresses financial accounting and reporting for costs associated with exit or disposal activities. This standard requires a liability to be recognized at fair value for costs associated with the exit or disposalactivities only when the liability is incurred, as opposed to recognizing a liability at the time the Company commitsto an exit plan as permitted under EITF Issue 94-3, "Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity". SFAS No. 146 is effective for exit or disposal activities initiatedafter December 31, 2002. SFAS No. 146 could result in the Company recognizing the cost of future exit ordisposal activities over a period of time as opposed to at a point in time.

On January 17, 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interestentities, an interpretation of ARB 51". The primary objectives of FIN No. 46 are to provide guidance on theidentification of entities for which control is achieved through means other than through voting rights (VariableInterest Entities) and how to determine when and which business enterprise should consolidate the VariableInterest Entity (the primary beneficiary). The transitional disclosure requirements of FIN No. 46 take effectimmediately and are required in all financial statements initially issued after January 31, 2003, if certain conditionsare met. The Company does not have any variable interest entities and therefore, FIN No. 46 will not impact itsfinancial statements.

The FASB's EITF Issue 02-16, "Accounting By A Customer (Including A Reseller) For Cash Consideration ReceivedFrom A Vendor" addressed the accounting treatment for vendor allowances. The Company has not completed theprocess of evaluating the impact of EITF Issue 02-16, however, the Company does not expect that its adoption in 2003will have a material impact on its financial position or results of operations.

NOTE 2 - ACQUISITION

On June 17, 2002, the Company acquired 100 percent of the outstanding common shares of Lands' End. The results ofLands' End's operations have been included in the consolidated financial statements since that date. Headquartered inDodgeville, Wisconsin, Lands' End is a leading direct merchant of traditionally styled, casual clothing for men, womenand children, accessories, footwear, home products and soft luggage.

The Company acquired Lands' End for $1.8 billion in cash. The acquisition has been accounted for using the purchasemethod in accordance with SFAS No. 141, "Business Combinations". Accordingly, the total purchase price haspreliminarily been allocated to the assets acquired and liabilities assumed based on their estimated fair values atacquisition as follows (amounts in millions):

Merchandise inventories $ 238Property and equipment 185Intangible assets (primarily indefinite lived tradenames) 704Goodwill 834Other assets 48Accounts payable and other liabilities (169) Total $ 1,840

Of the $704 million acquired intangibles, $700 million was assigned to registered tradenames that are not subjectto amortization and $4 million was assigned to customer lists with an estimated useful life of three years.

The amount allocated to goodwill is reflective of the benefit the Company expects to realize from leveraging theLands' End brand name across its retail business. The goodwill related to the Lands' End acquisition is not deductiblefor tax purposes.

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The following unaudited pro forma information presents the results of operations of the Company as if the Lands' Endacquisition had taken place at the beginning of each respective period. Pro forma adjustments have been made toreflect additional interest expense from the $1.8 billion in debt associated with the acquisition. The pro forma resultsof operations include $18 million of non-recurring transaction costs incurred by Lands' End in 2002.

millions, except per share data 2002 2001 (Pro Forma) (Pro Forma)

Revenues $ 42,020 $ 42,524Income before cumulative effect of accounting change 1,571 736Net income 1,363 736Earnings per share: Basic Earnings per share 4.29 2.25 Diluted Earnings per share 4.25 2.24

The unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicativeof the results of operations that would have occurred had the Lands' End acquisition occurred at the beginning of therespective periods.

NOTE 3 - CREDIT CARD RECEIVABLES

A summary of the Company's credit card receivables at year-end is as follows:

millions 2002 2001

Credit card receivables (1)

Domestic $ 30,766 $ 27,599 Sears Canada 1,797 1,682

32,563 29,281Other customer receivables 32 40Total credit card receivables $ 32,595 $ 29,321

(1) At December 28, 2002 and December 29, 2001, $23.8 billion and $16.1 billion, respectively, of credit card receivables were segregated in securitization trusts.

Summary of Securitization Process

Credit card securitizations are utilized as part of the Company's overall funding strategy. Sears sells certain of itscredit card receivable balances to various subsidiaries that in turn transfer those balances to master trusts ("trusts").The trusts then securitize the receivable balances by issuing certificates representing undivided interests in thetrusts' receivables to both outside investors and to the Company (as a retained interest). These certificates entitlethe holder to a series of scheduled cash flows under preset terms and conditions, the receipt of which is dependentupon cash flows generated by the related trusts' assets. In each securitization transaction, a Sears subsidiary hasretained certain subordinated interests which serve as a credit enhancement to the certificates held by the outsideinvestors. As a result, the credit quality of certificates held by outside investors is enhanced. However, theinvestors and the trusts have no recourse against the Company beyond the trust assets.

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Accounting for Securitizations

On March 31, 2001, the Company adopted the requirements of SFAS No. 140, "Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities", which superceded SFAS No. 125. Under SFASNo. 125, the Company's securitization transactions were accounted for as sales of receivables. SFAS No. 140established new conditions for a securitization to be accounted for as a sale of receivables. Specifically, SFAS No.140 changed the requirements for an entity to be a qualifying special purpose entity and modified under whatconditions a transferor has retained effective control over transferred assets. The new standard became effectivefor transfers occurring after March 31, 2001.

The addition of previously uncommitted assets to the securitization trust in April 2001 required the Company toconsolidate the securitization structure for financial reporting purposes on a prospective basis. Accordingly, theCompany recorded on the balance sheet approximately $8.1 billion of previously unconsolidated securitized creditcard receivables and related securitization borrowings in the second quarter of 2001. In addition, approximately$3.9 billion of assets were reclassified to credit card receivables from retained interest in transferred credit cardreceivables. The Company recognized incremental operating income of $40 million and $128 million in 2001 and2000, respectively, from net securitization activity. The Company now accounts for securitizations as securedborrowings.

In connection with the consolidation of the securitization structure, the Company recognized a non-cash, pretaxcharge of $522 million in 2001 to establish an allowance for uncollectible accounts related to the receivables whichwere previously considered as sold or accounted for as retained interests in transferred credit card receivables.

Significant Group Concentrations of Credit Risk

The Company grants credit to a large and diverse group of customers throughout North America. The five statesand the respective receivable balances in which the Company had the largest amount of credit card receivableswere as follows:

millions2002

% ofBalance 2001

% ofBalance

California $ 3,417 11.2% $ 2,982 10.9%Texas 2,380 7.8% 2,139 7.9%Florida 2,140 7.0% 1,919 7.0%New York 1,960 6.4% 1,699 6.2%Pennsylvania 1,506 4.9% 1,349 5.0%

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NOTE 4 - ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

A summary of the activity in the allowance for uncollectible accounts is as follows:

millions 2002 2001

Beginning of year balance $ 1,166 $ 686Provision excluding noncomparable items 1,961 1,497Noncomparable items: Change in estimate 300 -- Securitization adjustment -- (153) Provision for previously securitized receivables -- 522Total provision 2,261 1,866

Net charge-offs (1,591) (1,289)Transfer to Securitization Master Trust -- (83)Reduction in accounts sold -- (14)Ending balance $ 1,836 $ 1,166

In the second quarter of 2002, the Company refined its method of determining its allowance for uncollectibleaccounts. The Company periodically reviews its accounting practices to ensure that its adopted policiesappropriately reflect changes in its businesses, the industries it operates in, and the regulatory and politicalenvironments. During the second quarter, the Company compared its methodology for computing the allowancefor uncollectible accounts to the methodologies of participants in the bank card industry. The Company believed that a comparison to bank card issuers was appropriate given the growth of the MasterCard product (approximately$8.5 billion in balances at the end of the second quarter of 2002). The Company determined that practice in theindustry was diverse and evolving, particularly in the areas of providing allowances for current accounts, financecharges and credit card fees. Also, during this review the Company became aware of new interpretive guidancethat banking regulators were proposing to narrow the diversity in practice. As a result of its review, the Companyrefined its methodology for determining the uncollectible portion of current accounts and credit card fee balances,resulting in an increase to the allowance for uncollectible accounts in the amount of $300 million in the secondquarter of 2002. In accordance with APB No. 20, "Accounting Changes", the effect of this change in accountingwas recorded as a change in accounting estimate in the second quarter of 2002.

In the first quarter of 2001, the Company's securitization transactions were accounted for as sales of receivables asrequired by SFAS No. 125. As a result of the sale treatment, the provision and net charge-offs were $153 millionless in the quarter than they would have been had the receivables been owned. In the second quarter of 2001, thesecuritized receivables which had previously been considered sold were reconsolidated on to the Company'sbalance sheet and a provision of $522 million was recorded to establish an allowance for uncollectible accounts forthese receivables.

NOTE 5 - BORROWINGS

Short-term borrowings consist of:

millions 2002 2001

Unsecured commercial paper $ 2,950 $ 3,412Asset-backed commercial paper 1,500 --Bank loans 75 75Promissory note -- 70Total short-term borrowings $ 4,525 $ 3,557

Weighted-average annual interest rate on short-term debt 2.8% 5.5%

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The Company maintains committed credit facilities to support its unsecured commercial paper borrowings. AtDecember 28, 2002, the Company's domestic financing subsidiary, Sears Roebuck Acceptance Corp. ("SRAC"),had a $4.4 billion syndicated credit agreement. This syndicated credit agreement provides for loans at prevailinginterest rates and matures in April 2003. Sears Canada has a credit facility totaling $510 million due to expire inNovember 2003. The Company pays commitment fees in connection with these credit agreements.

The Company's domestic financing subsidiary, SRFG, Inc., maintains an asset-backed commercial paper program. As of December 28, 2002, this program had access up to $3.2 billion, of which $1.5 billion was outstanding. Thisprogram had an original expiration date in March 2003. $2.8 billion of this program was renewed on February 28,2003, with an expiration in February 2004.

On February 24, 2003, SRAC, through a syndicate of banks, replaced its existing credit facility with an unsecured,364-day revolving credit facility in the amount of $3.5 billion. The new facility includes the option to extend therepayment of borrowings, if any, to February 2005.

The Company had interest rate swap agreements that established floating rates on $10.7 billion and $10.6 billion oflong-term fixed rate debt at December 28, 2002 and December 29, 2001, respectively. The weighted-averagematurity of these agreements was approximately 3.5 years and 4.5 years as of December 28, 2002 and December29, 2001, respectively. The weighted-average interest rate received by the Company related to the agreements was4.5% and 4.4% at December 28, 2002 and December 29, 2001, respectively.

Long-term debt is as follows:ISSUE 2002 2001

millions

SEARS, ROEBUCK AND CO.6.25% Notes, due in 2004 $ 300 $ 3009.375% Debentures, due 2011 300 3006.15% to 10.0% Medium-Term Notes, due 2003 to 2021 610 759

SEARS ROEBUCK ACCEPTANCE CORP.6% to 7.50% Notes, due 2003 to 2042 8,542 7,3214.50% to 7.50% Medium-Term Notes, due 2003 to 2013 1,678 2,222LIBOR + 0.20% to 1.18% Floating Rate Medium-Term Notes, due 2003 to 2004 440 540

SRFG, INC.5.25% to 7.50% Asset-backed certificates, due 2003 to 2005 3,671 5,074LIBOR + 0.10% to 1.25% Floating Rate Asset-backed certificates, due 2004 to 2012 8,280 3,878

SEARS DC CORP.8.55% to 9.26% Medium-Term Notes, due 2003 to 2012 53 78

SEARS CANADA INC.6.55% to 7.45% Debentures and Medium-Term Notes, due 2006 to 2010 398 391

SEARS CANADA RECEIVABLES TRUST4.72% to 9.18% Receivables Trusts, due 2003 to 2006 757 860

CAPITALIZED LEASE OBLIGATIONS 458 458OTHER NOTES AND MORTGAGES 16 16Total long-term debt 25,503 22,197SFAS 133 Hedge Accounting Adjustment (see Note 6) 609 (119)Current maturities (4,808) (3,157)Long-term debt $ 21,304 $ 18,921Weighted-average annual interest rate on long-term debt 4.4% 5.5%

The fair value of long-term debt was $25.1 billion and $22.6 billion at December 28, 2002 and December 29,2001, respectively.

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As of December 28, 2002, long-term debt maturities for the next five years and thereafter are as follows:

millions

2003 . . . . . . . . . . . $ 4,8082004 . . . . . . . . . . . 3,2362005 . . . . . . . . . . . 3,9842006 . . . . . . . . . . . 2,6402007 and thereafter. . . . . 10,835

$ 25,503

The Company paid interest of $1.1 billion, $1.3 billion and $1.2 billion in 2002, 2001 and 2000, respectively. Interest capitalized was $4 million, $11 million and $4 million in 2002, 2001 and 2000, respectively.

NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL GUARANTEES

Effective in the first quarter of 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instrumentsand Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments andCertain Hedging Activities". The adoption of SFAS No. 133 did not affect net income. In 2001, the cumulativeeffect of the change in accounting principle reduced other comprehensive income ("OCI") by $262 million,including the reclassification to OCI of a $228 million ($389 million pretax) deferred loss on an interest rate swapthat was terminated in 1997 and the recognition in OCI of $34 million ($56 million pretax) related to a cash flowhedge. The deferred swap loss is being amortized into earnings at the rate of approximately $17 million ($26million pretax) a year over the original life of the interest rate swap. During the second quarter of 2001, theCompany terminated the cash flow hedge. The termination had no impact on earnings.

The Company utilizes derivative financial instruments as part of an overall risk management program designed toaddress certain financial exposures faced by the Company. The only significant derivative instruments theCompany currently holds are interest rate swaps. As of December 28, 2002, the Company had interest rate swapswith an aggregate fair value of $690 million that have been used to synthetically convert certain of the Company'sdomestic fixed rate debt to variable rate. The objective of this conversion is to achieve increased levels of variablerate funding given the growth of variable rate receivable levels within the Company's credit card receivablesportfolio resulting primarily from the Company's conversion of the finance charge on the Sears Card from fixedrate to variable rate in 2002.

The Company's interest rate swaps have been recorded on the balance sheet at fair value, classified as $81 millionof other receivables and $609 million of other assets. For accounting purposes, the swaps are designated andqualify as fair value hedges of certain of the Company's fixed rate debt instruments. As the critical terms of theswaps are designed to match those of the underlying hedged debt, the change in fair value of the swaps is largelyoffset by changes in fair value recorded on the hedged debt. Consequently, the amount of hedge ineffectivenessrecorded during 2002 in connection with these hedges was not material and is reflected as a component of interestexpense.

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The following sets forth the notional amounts and fair values of interest rate swaps outstanding at the end of 2002and 2001:

2002 2001 millions Contract or

NotionalAmount Fair Value

Contract orNotionalAmount Fair Value

Interest rate swap agreements: Pay floating rate, receive fixed rate $ 10,742 $ 690 $ 10,642 $ (63)

The Company paid a weighted-average rate of 1.86% and received a weighted-average rate of 4.47% in 2002. Thefair values of interest rate swaps are based on prices quoted from derivative dealers. If a counterparty fails to meetthe terms of a swap agreement, the Company's exposure is limited to the net amount that would have been received,if any, over the agreement's remaining life, net of any collateral posted.

Financial Guarantees

The Company had total financial guarantees of $84 million at December 28, 2002, which primarily included a $79million guaranty representing a commitment by the Company to guarantee the performance of certain municipalbonds issued in connection with the Company's headquarters building. Payments under this guaranty were $6million and $5 million for 2002 and 2001, respectively, and have been recorded as long-term receivables since theyare expected to be recovered from future cash flows generated by the property. This guaranty expires in 2012. Inaddition, the Company had additional guarantees of $5 million in which the Company guaranteed leases of certainCompany affiliates.

NOTE 7 - SPECIAL CHARGES AND IMPAIRMENTS

Special charges and impairments included the following:

millions 2002 2001 2000Restructuring Initiatives Sears Canada – Eatons conversion $ 111 $ -- $ -- Productivity initiatives -- 123 -- Product category exits -- 151 -- 2000 store closures -- -- 136Other Special Charges Homelife closure -- 185 -- Exide battery litigation settlement -- 63 -- STPC impairment -- -- 115 Other -- 20 --

$ 111 $ 542 $ 251

Sears Canada – Eatons Conversion

In February 2002, Sears Canada announced its intention to convert the remaining seven Eatons stores to the SearsCanada banner. The conversion of the stores was completed at the end of July 2002. This decision enabled theCompany to better leverage its buying and advertising efforts, and take better advantage of the Sears brand'sequity. The Company recorded a one-time, pretax charge of $111 million in 2002 related to the conversions. Of

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the $111 million charge, $92 million was to record asset impairments on fixtures and equipment in such facilities. The remaining $19 million was comprised of $16 million for contractual obligations and holding costs and $3million for employee termination costs. As of December 28, 2002, all actions identified under this plan have beenexecuted.

Productivity Initiatives

During the fourth quarter of 2001, the Company announced a series of strategic initiatives designed to revitalize itsFull-line Stores and reduce operating expenses. In connection therewith, the Company recorded a pretax charge of$123 million related to employee termination, facility closing and other exit costs. Of the $123 million charge,$102 million is for employee termination costs associated with the planned elimination of 5,950 associate positionsas part of this initiative. The positions eliminated include store support positions within the Company'sheadquarters as well as positions within store and field operations. The remaining $21 million of productivity-related charges was comprised of $13 million for contractual obligations and holding costs associated with certainsupport facilities to be vacated as a result of the plan, and $8 million to record asset impairments on fixtures andequipment in such facilities. As of December 28, 2002, all actions identified under this plan have been executed.

Product Category Exits

During 2001, the Company announced its decision to exit certain product categories within its Full-line Stores,including its skin care and color cosmetics, installed floor covering and custom window treatments businesses. Inconnection with these exits, the Company recorded pretax charges totaling $151 million during 2001. Of the $151million charge, $106 million was recorded for the cost of settling contractual obligations to certain vendors andcontractors and for other exit costs associated with the Company's plan to discontinue these businesses, includingincremental customer warranty claims liability to be incurred by the Company in the absence of ongoingrelationships with certain product manufacturers. Also included within the $151 million charge were assetimpairment charges of $38 million, primarily reflecting the write-down of store fixtures within the exitedbusinesses to their estimated fair value. The remaining $7 million of product category exit charges was foremployee termination costs associated with management's decision to eliminate 1,980 associate positionsconnected to the exited businesses, primarily store sales positions. As of December 28, 2002, all positions havebeen eliminated.

Homelife Closure

The Company sold its Homelife furniture division to Citicorp Venture Capital, Ltd. in early 1999. As part of thesale, Sears received a 19% equity interest in the new Homelife Corporation. Additionally, the Company assignedcertain store leases to Homelife in connection with the sale. Subsequently, the Company guaranteed certainindebtedness related to the new Homelife Corporation, and also obtained secured interests in certain Homelifeassets. Homelife ceased operations and subsequently filed for Chapter 11 bankruptcy protection on July 16, 2001.The Company recorded a pretax charge of $185 million in the second quarter of 2001 to reflect the Company'sestimated obligations and asset impairments relative to Homelife. The pretax charge included an accrual for netfuture lease obligations of $150 million reduced by estimated sublease income, early terminations and leasemitigation costs of $50 million; indebtedness guarantees, obligations to Homelife customers related to unshippedproduct billed on the Sears card, and other costs of $69 million; and write-offs of $16 million for logistics servicespreviously provided to Homelife. As of December 28, 2002, the Company has paid approximately $119 millionrelative to its Homelife obligations. While the timing of any additional cash outlays related to these charges isuncertain, management does not expect that such payments will have a material impact on the liquidity or financialcondition of the Company.

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Exide Battery Litigation Settlement

The Company reached a civil settlement agreement in December 2001 with the U.S. Attorney for the SouthernDistrict of Illinois concluding an investigation into the advertising of certain Company automotive batteries in 1994and 1995 that were manufactured by Exide Technologies. A pretax charge of $63 million was recorded to reflectthe Company's payment obligation to the government under the terms of the settlement agreement.

Other

During 1999 and 2000, the Company made investments totaling $20 million in a privately-held retail companyspecializing in home decorating products and services. In 2001, the Company recorded a pretax charge of $20million to write-off its investment in this entity as it had ceased operations.

2000 Store Closures

In December 2000, the Company announced the planned closure of 87 underperforming stores consisting of53 NTB, 30 Hardware and four Full-line stores (including two Sears Auto Centers) and the termination ofapproximately 2,000 positions as a direct result of the store closures. In connection with the store closings, theCompany recognized a pretax charge of $150 million in the fourth quarter of 2000 of which $59 million related toasset impairments, $17 million related to goodwill impairment, $57 million related to lease and holding costs, $14million related to inventory liquidation losses and $3 million related to employee termination costs. Of the $150million charge, $136 million was recorded in Special Charges and Impairments and $14 million was recorded inCost of Sales.

The asset impairment charge related to the write-down of property and equipment to fair value (less costs to selland net of estimated salvage value). The assets consisted primarily of land, abandoned leasehold improvementsand equipment used at the closed stores. As part of the asset impairment review for the closed stores, the Companywrote-off the goodwill allocated to the stores (on a pro rata basis using the relative fair values of the long-livedassets at the acquisition date). The charge also provided a reserve for incremental costs and contractual obligationsfor items such as estimated future lease obligations net of sublease income, lease termination payments and otherfacility exit costs incurred as a direct result of the store closures. As a result of the store closings, certain inventorywas written down to its net realizable value. This resulted in a charge to cost of goods sold of $14 million. As ofDecember 28, 2002, all 87 stores have been closed and all affected employees have been terminated.

Impairment of Investment in Sears Termite and Pest Control ("STPC")

During the fourth quarter of 2000, due to ongoing and anticipated operating losses and based on estimated futurecash flows, management determined that the assets of Sears Termite and Pest Control were impaired andcommitted to a plan to dispose of this business. Accordingly, the Company recorded a $115 million charge toreflect the assets at fair value, less related costs to dispose. On October 1, 2001, the Company completed the saleof certain assets of STPC to the ServiceMaster Company. Under the terms of the transaction, the Company willprovide certain transition services and may share in the cost of remediating termite damage claims in excess ofdefined amounts, if any, for a limited period of time. This transaction did not materially affect results of operationsor consolidated financial position or require adjustment to the 2000 special charge.

Following is a summary of the 2002 activity in the reserves established in connection with the Company'srestructuring initiatives:

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millions

EndingReserveBalance12/29/01

2002Charges

AssetWrite-Down

CashPayments

EndingReserveBalance12/28/02

Sears CanadaEmployee termination costs $ -- $ 3 $ -- $ (3) $ --Contractual obligations and other costs -- 16 -- (16) --Asset impairments -- 92 (92) -- --

-- 111 (92) (19) --Productivity Initiatives

Employee termination costs 92 -- -- (69) 23Contractual obligations and other costs 5 -- -- (5) --

97 -- -- (74) 23Product Category Exits

Employee termination costs 7 -- -- (6) 1Contractual obligations and other costs 65 -- -- (26) 39

72 -- -- (32) 402000 Store Closures

Lease and holding costs 41 -- -- (13) 2841 -- -- (13) 28

Total $ 210 $ 111 $ (92) $ (138) $ 91

As of December 28, 2002 all restructuring activities have been substantially completed. The reserve for employeetermination costs will be paid out in the first half of 2003. The remaining reserves will be paid out over severalyears as they primarily relate to lease obligations and long-term product warranties.

NOTE 8 - LEASES

The Company leases certain stores, office facilities, warehouses, computers and transportation equipment.

Operating and capital lease obligations are based upon contractual minimum rates and, for certain stores, amountsin excess of these minimum rates are payable based upon specified percentages of sales. Contingent rent is accruedover the lease term, provided that the achievement of the specified sales level that triggers the contingent rental isprobable. Certain leases include renewal or purchase options. Operating lease rentals were $474 million, $483million and $409 million, including contingent rentals of $56 million, $59 million and $54 million in 2002, 2001and 2000, respectively.

Minimum lease obligations, excluding taxes, insurance and other expenses payable directly by the Company, forleases in effect as of December 28, 2002, are as follows:

millionsCapitalLeases

OperatingLeases

2003 $ 76 $ 3352004 72 2902005 70 2502006 69 2082007 62 164After 2007 643 1,046Total minimum payments 992 $ 2,293Less imputed interest 534Present value of minimum lease payments 458Less current maturities 23Long-term obligations $ 435

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NOTE 9 - SHAREHOLDERS' EQUITY

Dividend Payments

Under terms of indentures entered into in 1981 and thereafter, the Company cannot take specified actions,including the declaration of cash dividends, that would cause its unencumbered assets, as defined, to fall below150% of its liabilities, as defined. At December 28, 2002, approximately $8.0 billion could be paid in dividends toshareholders under the most restrictive indentures.

Share Repurchase Program

The Company repurchased shares in 2002, 2001 and 2000 under share repurchase programs approved by the Boardof Directors. As of December 28, 2002, the Company had remaining authorization to repurchase $1.25 billion ofshares by December 31, 2004 under a $1.5 billion share repurchase plan approved by the Board of Directors onDecember 12, 2001.

Comprehensive Income and Accumulated Other Comprehensive (Loss) Income

The following table shows the computation of comprehensive income:

millions December 28,2002

December 29,2001

December 30,2000

Net income $ 1,376 $ 735 $ 1,343Other comprehensive income (loss):Minimum pension liability (1) (246) (333) 63Cumulative effect of a change in accounting for derivatives, net of tax of $183 -- (262) --

Amounts amortized into interest expense from OCI (2) 16 17 --Change in fair value of cash flow hedges (3) (6) 34 --Unrealized loss on investments (4) -- (1) (18)Foreign currency translation adjustments 11 (37) (7)

Total accumulated other comprehensive (loss) income (225) (582) 38

Total comprehensive income $ 1,151 $ 153 $ 1,381

(1) Net of tax of $153 million, $184 million and $36 million for 2002, 2001 and 2000, respectively.(2) Net of tax of $10 million and $9 million for 2002 and 2001, respectively.(3) Net of tax of $2 million and $22 million for 2002 and 2001, respectively.(4) Net of tax of $1 million and $10 million for 2001 and 2000, respectively.

The following table displays the components of accumulated other comprehensive loss:

millions 2002 2001 2000

Accumulated derivative loss $ (201) $ (211) $ --Currency translation adjustments (144) (155) (118)Minimum pension liability, net of tax (711) (465) (132)Unrealized gain on securities held, net of tax -- -- 1Accumulated other comprehensive loss $ (1,056) $ (831) $ (249)

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NOTE 10 - BENEFIT PLANS

Expenses for retirement and savings-related benefit plans were as follows:

millions 2002 2001 2000

Sears 401(k) Savings Plan $ 26 $ 23 $ 29Pension plans 70 68 116Postretirement benefits (60) (65) (68)Total $ 36 $ 26 $ 77

Sears 401(k) Savings Plan

Most domestic employees are eligible to become members of the Sears 401(k) Savings Plan (the "Plan"). Underthe terms of the Plan, the Company matches a portion of employee contributions with Sears common shares. Perthe Plan, the Company match is 70% of eligible employee contributions. The Company's matching contributionswere $72 million, $76 million and $72 million in 2002, 2001 and 2000, respectively. Matching contributions weremade at the end of each calendar quarter, based on the quarter-end stock price.

The Plan includes an Employee Stock Ownership Plan ("the ESOP") to prefund a portion of the Company'santicipated contribution. The Company provided the ESOP with a loan that was used to purchase Sears commonshares in 1989. The purchased shares represent deferred compensation expense, which is presented as a reductionof shareholders' equity and recognized as expense when the shares are allocated to employees to fund the Companycontribution. The per share cost of Sears common shares purchased by the ESOP in 1989 was $15.27. TheCompany uses the ESOP shares or cash to fund the Company contribution, which thereby reduces expense. TheCompany contribution funded with ESOP shares was $56 million, $76 million and $72 million in 2002, 2001 and2000, respectively, and the Company contribution funded with cash was $16 million in 2002.

The ESOP loan bears interest at 6.1% and is repaid from dividends on the ESOP shares and additional cashpayments provided by the Company. The Company has contributed cash to the ESOP annually in the amountequal to the ESOP's required interest and principal payments on the loan, less dividends received on the ESOPshares. The cash payments amounted to $11, $33 and $118 million in 2002, 2001 and 2000, respectively. Thebalance of the ESOP loan was $16 and $38 million at December 28, 2002 and December 29, 2001, respectively. Cash on hand in the ESOP at December 28, 2002 was $3 million.

In 2002, the ESOP allocated 1.3 million shares to employees. At December 28, 2002, 23.2 million ESOP shareshad been allocated and 2.7 million are available for future allocation. All ESOP shares are considered outstandingin the calculation of earnings per share.

Retirement Benefit Plans

Certain domestic full-time and part-time employees are eligible to participate in noncontributory defined benefitplans after meeting age and service requirements. Substantially all Canadian employees are eligible to participatein contributory defined benefit plans. Pension benefits are based on length of service, compensation and, in certainplans, Social Security or other benefits. Funding for the various plans is determined using various actuarial costmethods. The Company uses October 31 as the measurement date for determining pension plan assets andobligations.

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In addition to providing pension benefits, the Company provides certain medical and life insurance benefits forretired employees. Employees may become eligible for medical benefits if they retire in accordance with theCompany's established retirement policy and are continuously insured under the Company's group medical plans orother approved plans for 10 or more years immediately prior to retirement. The Company shares the cost of theretiree medical benefits with retirees based on years of service. Generally, the Company's share of these benefitcosts will be capped at the Company contribution calculated during the year of retirement. The Company'spostretirement benefit plans are not funded. The Company has the right to modify or terminate these plans.

The change in benefit obligation, change in plan assets, funded status and reconciliation to amounts recognized inthe consolidated balance sheets are as follows:

Pension Benefitsmillions Domestic Sears Canada Total

2002 2001 2002 2001 2002 2001Change in projected benefit obligation Beginning balance $ 2,421 $ 2,197 $ 670 $ 620 $ 3,091 $ 2,817 Benefits earned during the period 69 54 20 14 89 68 Interest cost 154 172 42 39 196 211 Actuarial loss (gain) 141 210 (78) 56 63 266 Benefits paid (280) (204) (36) (32) (316) (236) Foreign exchange impact -- -- 13 (38) 13 (38) Other (5) (8) 11 11 6 3 Ending balance $ 2,500 $ 2,421 $ 642 $ 670 $ 3,142 $ 3,091

Change in assets at fair value: Beginning balance $ 1,586 $ 1,873 $ 763 $ 916 $ 2,349 $ 2,789 Actual return on plan assets (107) (191) (40) (80) (147) (271) Company contributions 187 116 1 -- 188 116 Benefits paid (280) (204) (36) (32) (316) (236) Foreign exchange impact -- -- 15 (57) 15 (57) Other (5) (8) 16 16 11 8 Ending balance $ 1,381 $ 1,586 $ 719 $ 763 $ 2,100 $ 2,349

Funded status of the plans $ (1,119) $ (835) $ 77 $ 93 $ (1,042) $ (742)Unrecognized net loss 1,303 908 66 45 1,369 953Unrecognized prior service (benefit) cost (29) (38) 19 23 (10) (15)Net amount recognized $ 155 $ 35 $ 162 $ 161 $ 317 $ 196

Amounts recognized in the balance sheetconsist of: Prepaid benefit cost $ -- $ -- $ 162 $ 161 $ 162 $ 161 Accrued benefit liability (965) (685) -- -- (965) (685) Accumulated other comprehensive

income (1) 1,120 720 -- -- 1,120 720 Net amount recognized $ 155 $ 35 $ 162 $ 161 $ 317 $ 196

(1) The minimum pension liability, net of tax, was $711 million and $465 million as of December 28, 2002 and December 29, 2001, respectively.

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Postretirement Benefitsmillions Domestic Sears Canada Total

2002 2001 2002 2001 2002 2001Change in projected benefit obligation: Beginning balance $ 814 $ 831 $ 91 $ 65 $ 905 $ 896 Benefits earned during the period 4 2 3 2 7 4 Interest cost 45 55 12 13 57 68 Actuarial loss 47 75 2 16 49 91 Benefits paid (139) (149) (8) (1) (147) (150) Foreign exchange impact -- -- 2 (4) 2 (4) Other 31 -- -- -- 31 -- Ending balance $ 802 $ 814 $ 102 $ 91 $ 904 $ 905

Change in plan assets at fair value: Beginning balance $ -- $ -- $ -- $ -- $ -- $ -- Company contributions 139 149 8 1 147 150 Benefits paid (139) (149) (8) (1) (147) (150) Ending balance $ -- $ -- $ -- $ -- $ -- $ --

Funded status of the plans $ (802) $ (814) $ (102) $ (91) $ (904) $ (905)Unrecognized net (gain) loss (322) (391) 34 27 (288) (364)Unrecognized prior service benefit (334) (463) -- -- (334) (463)Net amount recognized $ (1,458) $ (1,668) $ (68) $ (64) $ (1,526) $ (1,732)

Amounts recognized in the balance sheet consist of:

Accrued benefit liability $ (1,458) $ (1,668) $ (68) $ (64) $ (1,526) $ (1,732)

Weighted-average assumptions are as follows:

Pension Benefits Postretirement Benefits2002 2001 2000 2002 2001 2000

Discount rate 7.00% 7.25% 8.25% 7.00% 7.25% 8.25%Return on plan assets 9.00% 9.00% 9.50% NA NA NARate of compensation increases 4.25% 4.00% 4.00% NA NA NA

The components of net periodic benefit cost are as follows:

Pension Benefits Postretirement Benefitsmillions 2002 2001 2000 2002 2001 2000

Components of net periodic benefit cost: Benefits earned during the period $ 89 $ 68 $ 83 $ 7 $ 4 $ 5 Interest cost 196 211 216 57 68 58 Expected return on plan assets (236) (221) (216) -- -- -- Amortization of unrecognized net prior service benefit (4) (4) (4) (97) (102) (102) Recognized net loss (gain) 29 18 42 (27) (35) (29) Other (4) (4) (5) -- -- -- Net periodic benefit cost (benefit) $ 70 $ 68 $ 116 $ (60) $ (65) $ (68)

For 2003 and beyond, the weighted-average health care cost trend rates used in measuring the postretirementbenefit expense are a 9.0% trend rate in 2003 to an ultimate trend rate of 5.0% in 2009 for pre-65 retirees, and a12.5% trend rate in 2003 to an ultimate trend rate of 6.5% in 2009 for post-65 retirees. A 100 basis point change

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in the assumed health care cost trend rate would have the following effects on the postretirement liability:

millions100 Basis

Point Increase100 Basis

Point Decrease

Effect on total service and interest cost components $ 3 $ (2)Effect on postretirement benefit obligation $ 20 $ (17)

NOTE 11 - STOCK-BASED COMPENSATION

Stock Option Plans

Options to purchase common shares of the Company have been granted to employees under various plans at pricesnot less than the fair market value of the shares on the dates the options were granted. Generally, options vest overa three- or four-year period and become exercisable either in equal, annual installments over the vesting period, orat the end of the vesting period. Options generally expire in 10 years.

In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", the fair value of each optiongrant is estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions listedbelow:

2002 2001 2000

Dividend yield 1.92% 1.60% 1.60%Expected volatility 41% 31% 31%Risk-free interest rate 4.75% 4.86% 6.55%Expected life of options 8 years 8 years 8 years

The Company had 0.9 million, 0.9 million and 1.1 million performance-based options outstanding at the end of2002, 2001 and 2000, respectively. These options contain vesting provisions that require the Company's shareprice to reach specified targets at specified intervals. Subject to the satisfaction of the performance-based features,these performance-based options vest 50% in 2003, 25% in 2004 and 25% in 2005. The Company did notrecognize compensation expense in 2002, 2001 or 2000 related to these options because the exercise priceexceeded the Company share price at each year-end.

Changes in stock options are as follows (shares in thousands):

2002 2001 2000

Shares

Weighted-AverageExercise

Price Shares


Price Shares


Price

Beginning balance 32,578 $ 39.04 21,950 $ 38.42 18,526 $ 40.44Granted 1,081 51.41 14,942 38.27 6,352 32.17Exercised (3,414) 32.96 (2,052) 22.74 (854) 22.90Canceled or expired (3,367) 38.97 (2,262) 42.32 (2,074) 44.13 Ending balance 26,878 $ 40.32 32,578 $ 39.04 21,950 $ 38.42

Reserved for future grant at year-end 17,381 15,755 15,566Exercisable 9,855 $ 43.33 9,399 $ 41.90 9,020 $ 32.82Fair value of options granted during the year $ 23.05 $ 14.47 $ 12.98

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The following table summarizes information about stock options outstanding at December 28, 2002 (shares inthousands):

Options Outstanding Options Exercisable

Range ofExercisePrices

NumberOutstandingat 12/28/02

Weighted-Average

RemainingContractual

Life in Years


Price

NumberExercisableat 12/28/02


Price

$10.00 to $20.00 83 1.3 $ 12.83 83 $ 12.8320.01 to 30.00 1,646 3.1 24.46 1,518 24.2430.01 to 40.00 16,675 8.7 36.39 1,822 35.4340.01 to 50.00 4,177 6.6 43.24 3,881 43.1950.01 to 64.00 4,297 6.2 59.32 2,551 61.55

$10.00 to $64.00 26,878 7.6 $ 40.32 9,855 $ 43.33

Associate Stock Purchase Plan

The Company's Associate Stock Purchase Plan ("ASPP") allows eligible employees the right to elect to use up to15% of their eligible compensation to purchase the Company's common shares on a quarterly basis at the lower of85% of the fair market value at the beginning or end of each calendar quarter. The maximum number of sharesavailable under the ASPP is 10 million. As of December 28, 2002, 3.5 million shares had been issued under theASPP and 6.5 million shares remain available.

Performance Share Plan

In 2001, the Company's Board of Directors approved the initiation of a performance share plan for a limitednumber of key executives. The level of awards to be earned under the plan is contingent upon the attainment ofspecific performance targets over a three-year period. Subject to the satisfaction of the performance-basedfeatures, the awards vest 50% in 2004 and 50% in 2005. Performance award expense of approximately $5 millionand $2 million was recorded in 2002 and 2001, respectively.

NOTE 12 - OTHER INCOME

Consolidated other income consists of:

millions 2002 2001 2000

Gain on sales of property and investments $ 347 $ 21 $ 19Equity income in unconsolidated companies 20 12 17Sears Mexico dividend 5 12 --Total $ 372 $ 45 $ 36

The gain on sales of property and investments for 2002 includes a gain of $336 million related to the sale of theCompany's holdings in Advance Auto Parts, Inc.

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NOTE 13 - INCOME TAXES

Income before income taxes, minority interests and cumulative effect of change in accounting principle is asfollows: millions 2002 2001 2000

Domestic $ 2,424 $ 1,125 $ 2,073Foreign 29 98 150Total $ 2,453 $ 1,223 $ 2,223

The provision for income tax expense consists of: millions 2002 2001 2000

CurrentFederal $ 988 $ 300 $ 736State 2 (4) 54Foreign 39 25 15Total 1,029 321 805

DeferredFederal (167) 88 (4)State 32 32 3Foreign (36) 26 27Total (171) 146 26

Income tax provision $ 858 $ 467 $ 831

A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:2002 2001 2000

Statutory federal rate 35.0% 35.0% 35.0%State income taxes, net of federal tax benefit 0.9 1.5 1.7Sears Canada deferred tax asset revaluation (0.8) 1.9 --Other (0.1) (0.2) 0.7

Effective income tax rate 35.0% 38.2% 37.4%

The major components of deferred tax assets and liabilities is as follow:millions 2002 2001

Deferred tax assets: Unearned service contract income $ 414 $ 506 Allowance for uncollectible accounts 646 454 State income taxes 61 150 Postretirement benefit liability 599 732 Minimum pension liability 417 258 Net operating loss carryforward 93 115 Special charges and impairments 90 117 Other deferred tax assets 544 580

Total deferred tax assets 2,864 2,912Deferred tax liabilities:

Property and equipment 293 361 Prepaid pension 172 101 LIFO 67 84 Deferred gain 236 313 Deferred revenue 356 335 Other deferred tax liabilities 257 445

Total deferred tax liabilities 1,381 1,639Net deferred tax asset $ 1,483 $ 1,273

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Management believes that the realization of the deferred tax assets is more likely than not, based on the expectationthat the Company will generate the necessary taxable income in future periods and, accordingly, no valuationreserve has been provided. Tax benefits from loss carryforwards will expire by year-end 2009.

U.S. income and foreign withholding taxes were not provided on certain unremitted earnings of internationalaffiliates which the Company considers to be permanent investments. The cumulative amount of unremittedincome for which income taxes have not been provided totaled $429 million at December 28, 2002. If theseearnings were to be remitted, taxes of $55 million would be due.

Income taxes of $918 million, $341 million and $868 million were paid in 2002, 2001 and 2000, respectively.

NOTE 14 - EARNINGS PER SHARE

The following table sets forth the computations of basic and diluted earnings per share:

millions, except per share data 2002 2001 2000

Net income (1) $ 1,376 $ 735 $ 1,343Average common shares outstanding 317.4 326.4 345.1Earnings per share – basic $ 4.34 $ 2.25 $ 3.89Dilutive effect of stock options 3.3 2.1 1.2

Average common and common equivalent shares outstanding 320.7 328.5 346.3Earnings per share – diluted $ 4.29 $ 2.24 $ 3.88

(1) Net income is the same for purposes of calculating basic and diluted EPS.

The following table sets forth the computations of basic and diluted earnings per share before cumulative effect ofchanges in accounting:

millions, except per share data 2002 2001 2000

Income before cumulative effect of accounting change (1) $ 1,584 $ 735 $ 1,343Average common shares outstanding 317.4 326.4 345.1Earnings per share – basic $ 4.99 $ 2.25 $ 3.89Dilutive effect of stock options 3.3 2.1 1.2

Average common and common equivalent shares outstanding 320.7 328.5 346.3Earnings per share before cumulative effect of accounting

change – diluted $ 4.94 $ 2.24 $ 3.88

(1) Income before cumulative of accounting change for goodwill is the same for purposes of calculating basic and diluted EPS.

In each period, certain options were excluded from the computation of diluted earnings per share because theywould have been anti-dilutive. At December 28, 2002, December 29, 2001 and December 30, 2000, options topurchase 5.8 million, 6.5 million and 11.3 million common shares at prices ranging from $45 to $64, $40 to $64and $33 to $64 per share were excluded from the 2002, 2001 and 2000 calculations, respectively.

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NOTE 15 - LEGAL PROCEEDINGS

Pending against the Company and certain of its officers and directors are a number of lawsuits, described below,that relate to the credit card business and public statements about it. The Company believes that all of these claimslack merit and is defending against them vigorously.

On October 18, 2002, a lawsuit was filed in the United States District Court for the Northern District of Illinoisagainst the Company and certain current and former officers alleging that certain public announcements by theCompany concerning its credit card business violated Sections 10(b) and 20(a) of the Securities Exchange Act of1934 and Rule 10b-5 promulgated thereunder. Additional lawsuits of the same tenor followed; with one exception,which is pending in the United States District Court for the Northern District of California, these cases are pendingin the Northern District of Illinois. The plaintiffs purport to represent classes of shareholders who purchased theCompany's common shares between January 17, 2002, and October 17, 2002. The Northern District of Illinoisactions are being consolidated into a single class action.

On November 15, 2002, two lawsuits were filed in the United States District Court for the Northern District ofIllinois against the Company, certain officers and directors, and alleged fiduciaries of Sears 401(k) Savings Plan(the "Plan"), seeking damages and equitable relief under the Employee Retirement Income Security Act("ERISA"). The plaintiffs purport to represent participants and beneficiaries of the Plan, and allege breaches offiduciary duties under ERISA in connection with the Plan's investment in the Company's common shares andalleged communications made to Plan participants regarding the Company's financial condition. A third complaintwas filed on December 16, 2002, making substantially the same claims. These actions have been consolidated intoa single class action.

On October 23, 2002, a purported derivative suit was filed in the Supreme Court of the State of New York againstthe Company (as a nominal defendant) and certain current and former directors seeking damages on behalf of theCompany. The complaint purports to allege a breach of fiduciary duty by the directors with respect to theCompany's management of its credit business. The Company's motion to dismiss is currently pending. Two likesuits were subsequently filed in the Circuit Court of Cook County, Illinois, and a third was filed in the UnitedStates District Court for the Northern District of Illinois. Motions have been or will be made to dismiss theseactions, or, in the alternative, to stay them, pending disposition of the action in New York.

The Company is subject to various other legal and governmental proceedings, many involving litigation incidentalto the businesses. Some matters contain class action allegations, environmental and asbestos exposure allegationsand other consumer based claims that involve compensatory, punitive or treble damage claims in very largeamounts as well as other types of relief. The consequences of these matters are not presently determinable but, inthe opinion of management of the Company after consulting with legal counsel and taking into account insuranceand reserves, the ultimate liability is not expected to have a material effect on annual results of operations, financialposition, liquidity or capital resources of the Company.

NOTE 16 - SUMMARY OF SEGMENT DATA

As of December 28, 2002, the Company organized its business into three domestic segments, Retail and RelatedServices, Credit and Financial Products and Corporate and Other, and one international segment, Sears Canada.

The Retail and Related Services segment consists of merchandise sales and related services, including servicecontracts, delivery and product installation and repair services. It includes all Sears selling channels, includingSpecialty and Full-line Stores as well as Direct to Customer operations which includes online, catalogs, clubs andservices and Lands' End online and catalog business.

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The Credit and Financial Products segment manages the Company's portfolio of Sears Card and MasterCardreceivables. Sears Card receivables arise primarily from purchases of merchandise and services from domesticoperations, whereas, MasterCard is widely accepted by merchants outside the Company. This segment alsoincludes related financial products, such as credit protection and insurance products.

The Corporate and Other segment includes activities that are of an overall holding company nature primarilyconsisting of administrative activities. This segment also includes Home Improvement Services such as siding andwindows and pest control. The pest control business was sold in 2001.

The Sears Canada segment includes similar retail, credit and corporate operations conducted by Sears Canada Inc.,a 54.4% owned subsidiary.

These businesses have been aggregated into their respective reportable segments based on the managementreporting structure and their similar economic characteristics, customers and distribution channels. No singleproduct or service accounts for a significant percentage of the Company's consolidated revenue.

External revenues and expenses are allocated between the applicable segments. For zero-percent financingpromotions in which customers receive free financing, Retail and Related Services reimburses Credit and FinancialProducts over the life of the financing period at a 10% annual rate. The cost is reported as selling expense byRetail and Related Services and an offsetting benefit is recognized by Credit and Financial Products.

The domestic segments participate in a centralized funding program. Interest expense is allocated to the Credit andFinancial Products segment based on its funding requirements. Funding includes debt reflected on the balancesheet and investor certificates related to credit card receivables transferred to trusts through securitizations. Theremainder of net domestic interest expense is reported in the Retail and Related Services segment.

The Company's segments are evaluated on a pretax basis, and a stand-alone income tax provision is not calculatedfor the individual segments. The Company includes its deferred income taxes within the Corporate and Othersegment. The Company excludes the impact of securitization income and noncomparable items from its analysis ofsegment results. The Company defines noncomparable items as transactions that are related to the implementationof special initiatives of the Company (generally special changes and impairments); unusual or infrequent in nature(e.g., significant one-time transactions gains/losses unrelated to core operations); or related changes in accounting.The other accounting policies of the segments are substantially the same as those described in the Company'ssummary of significant accounting policies footnote.

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2002Reconciling Items

millionsRetail and

RelatedServices

Credit andFinancialProducts

Corporateand

OtherSears

Canada Total

Securi-tizationImpact

Noncom-parableItems

Consoli-datedGAAP

Revenues Merchandise sales and services $ 31,459 $ -- $ 326 $ 3,913 $ 35,698 $ -- $ -- $ 35,698 Credit and financial products

revenues -- 5,392 -- 276 5,668 -- -- 5,668Total revenues 31,459 5,392 326 4,189 41,366 -- -- 41,366Costs and expenses Cost of sales, buying and occupancy 22,743 -- 121 2,782 25,646 -- -- 25,646 Selling and administrative 6,816 955 442 1,036 9,249 -- -- 9,249 Provision for uncollectible accounts -- 1,903 -- 58 1,961 -- 300 2,261 Depreciation and amortization 710 18 55 92 875 -- -- 875 Interest 35 1,014 -- 94 1,143 -- 1,143 Special charges and impairments -- -- -- -- -- -- 111 111

Total costs and expenses 30,304 3,890 618 4,062 38,874 -- 411 39,285

Operating income (loss) $ 1,155 $ 1,502 $ (292) $ 127 $ 2,492 $ -- $ (411) $ 2,081

Total assets $ 12,469 $ 32,207 $ 2,252 $ 3,481 $ 50,409

Capital expenditures $ 894 $ 6 $ 18 $ 117 $ 1,035


millionsRetail and

RelatedServices


Corporateand

OtherSears

Canada Total


Noncom-parableItems

Consoli-datedGAAP


revenues -- 5,216 -- 294 5,510 (275) -- 5,235Total revenues 31,346 5,216 378 4,325 41,265 (275) -- 40,990Costs and expenses Cost of sales, buying and occupancy 23,081 -- 159 2,994 26,234 -- -- 26,234 Selling and administrative 6,628 833 473 997 8,931 (39) -- 8,892 Provision for uncollectible accounts -- 1,441 -- 56 1,497 (153) 522 1,866 Depreciation and amortization 704 18 58 83 863 -- -- 863 Interest 32 1,395 -- 111 1,538 (123) -- 1,415 Special charges and impairments -- -- -- -- -- -- 542 542

Total costs and expenses 30,445 3,687 690 4,241 39,063 (315) 1,064 39,812

Operating income (loss) $ 901 $ 1,529 $ (312) $ 84 $ 2,202 $ 40 $ (1,064) $ 1,178

Total assets $ 10,674 $ 27,900 $ 2,264 $ 3,479 $ 44,317


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millions

Retail andRelatedServices


Corporateand

OtherSears

Canada Total


Noncom-parableItems

Consoli-datedGAAP


revenues -- 5,247 -- 293 5,540 (969) -- 4,571Total revenues 31,935 5,247 353 4,282 41,817 (969) -- 40,848Costs and expenses Cost of sales, buying and occupancy 23,573 -- 144 2,901 26,618 -- 14 26,632 Selling and administrative 6,687 810 407 1,038 8,942 (135) -- 8,807 Provision for uncollectible accounts -- 1,358 -- 48 1,406 (522) -- 884 Depreciation and amortization 710 16 53 60 839 -- -- 839 Interest 25 1,550 -- 113 1,688 (440) -- 1,248 Special charges and impairments -- -- -- -- -- -- 251 251

Total costs and expenses 30,995 3,734 604 4,160 39,493 (1,097) 265 38,661

Operating income (loss) $ 940 $ 1,513 $ (251) $ 122 $ 2,324 $ 128 $ (265) $ 2,187

Total assets $ 11,221 $ 20,026 $ 1,936 $ 3,716 $ 36,899


NOTE 17 - IMPLEMENTATION OF NEW ACCOUNTING STANDARD

SFAS No. 145, "Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, andTechnical Corrections", is effective for all financial statements issued on or after May 15, 2002. SFAS 145,eliminates Statement 4, which required all gains and losses from debt extinguishment to be aggregated, and ifmaterial, classified as an extraordinary item, net of tax. Under SFAS No. 145, debt extinguishments used as part ofan entity's risk management strategy do not meet the criteria for classification as extraordinary items. TheCompany's adoption of SFAS No. 145 did not have an impact on the consolidated financial statements.

Effective at the beginning of 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets".Upon adoption of SFAS No. 142, goodwill amortization ceased. Goodwill is now subject to fair-value basedimpairment tests performed, at a minimum, on an annual basis. In addition, a transitional goodwill impairment testis required as of the adoption date. These impairment tests are conducted on each business of the Company wheregoodwill is recorded, and may require two steps. The initial step is designed to identify potential goodwillimpairment by comparing an estimate of fair value for each applicable business to its respective carrying value. For those businesses where the carrying value exceeds fair value, a second step is performed to measure theamount of goodwill impairment in existence, if any.

The Company had approximately $371 million in positive goodwill and $77 million in negative goodwill recordedin its consolidated balance sheet at the beginning of 2002 as well as approximately $104 million in positivegoodwill related to an equity method investment which is not subject to SFAS No. 142 impairment tests. The $77million in negative goodwill was required to be recognized into income upon adoption of the Statement. TheCompany completed the required transitional goodwill impairment test in the first quarter of 2002 and determinedthat $261 million of goodwill recorded within the Company's Retail and Related Services segment, primarilyrelated to NTB and Orchard Supply Hardware, was impaired under the fair value impairment test approachrequired by SFAS No. 142.

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The fair value of these reporting units was estimated using the expected present value of associated future cashflows and market values of comparable businesses where available. Upon adoption of the Statement, a $208million charge, net of tax and minority interest, was recognized in the first quarter of 2002 to record thisimpairment as well as the recognition of negative goodwill and was classified as a cumulative effect of a change inaccounting principle.

The following table presents the pro forma effect of the adoption of SFAS No. 142 on recent fiscal periods as if thechange was applied at the beginning of the respective fiscal year:

millions, except earnings (loss) per common share 2001 2000

Reported net income $ 735 $ 1,343Add back: Negative goodwill amortization (14) (15) Positive goodwill amortization 20 24Pro forma net income $ 741 $ 1,352

Earnings per common share Basic earnings per share: Reported net income $ 2.25 $ 3.89 Goodwill amortization 0.02 0.03 Pro forma net income $ 2.27 $ 3.92

Diluted earnings per share: Reported net income $ 2.24 $ 3.88 Goodwill amortization 0.02 0.03 Pro forma net income $ 2.26 $ 3.91

Average common shares outstanding 326.4 345.1Average common and common equivalent shares outstanding 328.5 346.3

The changes in the carrying amount of goodwill as of December 28, 2002 are as follows:

millions

Retail andRelatedServices


Corporateand

OtherSears

Canada Total

Balance as of December 29, 2001 $ 291 $ 2 $ 61 $ (60) $ 294 Cumulative effect of adopting SFAS No. 142: Impairment loss recognized (261) -- -- -- (261) Elimination of negative goodwill -- -- -- 77 77 Acquisition of Lands' End 834 -- -- -- 834

Balance as of December 28, 2002 $ 864 $ 2 $ 61 $ 17 $ 944

The Company's policy is to test the realizability of goodwill as of the end of the fiscal year. The Company testedthe realizability of the $944 million of goodwill as of December 28, 2002 resulting in no additional impairmentbeing recorded.

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NOTE 18 - QUARTERLY RESULTS (Unaudited)

millions, except per common share data

First Quarter Second Quarter Third Quarter Fourth Quarter Year2002 2001 2002 2001 2002 2001 2002 2001 2002 2001

Revenues $ 9,037 $ 8,857 $ 10,142 $ 10,183 $ 9,669 $ 9,730 $ 12,518 $ 12,220 $ 41,366 $ 40,990Operating income 356 272 366 (311) 275 391 1,084 826 2,081 1,178Net income before accounting

change 318 176 229 (197) 189 262 848 494 1,584 735Net income 110 176 229 (197) 189 262 848 494 1,376 735Earnings (loss) per share before

accounting change - diluted 0.98 0.53 0.71 (0.60) 0.59 0.80 2.67 1.52 4.94 2.24Earnings (loss) per common

share - diluted $ 0.34 $ 0.53 $ 0.71 $ (0.60) $ 0.59 $ 0.80 $ 2.67 $ 1.52 $ 4.29 $ 2.24

The fourth quarter pretax LIFO adjustments were credits of $19 and $5 million in 2002 and 2001, compared withcharges of $30 million for the first nine months of the respective years.

Total of quarterly earnings per common share may not equal the annual amount because net income per commonshare is calculated independently for each quarter.

F -

38

SEARS, ROEBUCK AND CO.SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

AdditionsBalance atbeginningof period

Charged tocosts andexpenses Deductions

Balance atend ofperiod

Year Ended December 28, 2002 Allowance for uncollectible accounts $ 1,166 $ 2,261 $ 1,591 $ 1,836

Year Ended December 29, 2001 Allowance for uncollectible accounts $ 686 $ 1,866 $ 1,386 $ 1,166

Year Ended December 30, 2000 Allowance for uncollectible accounts $ 760 $ 884 $ 958 $ 686

F -

1

EXHIBIT INDEX

Sears, Roebuck and Co. Form 10-KFor the Year Ended December 28, 2002

3.1 Restated Certificate of Incorporation, as amended to May 13, 1996 (incorporated byreference to Exhibit 3(a) to Registration Statement No. 333-8141 of Registrant).

3.2 By-Laws as amended to February 14, 2001 (incorporated by reference to Exhibit 3.(ii) toRegistrant's Annual Report on Form 10-K for the fiscal year ended December 30, 2000).**

4.1 Forms of restricted stock grants under Registrant's 1990 Employees Stock Plan (incorporatedby reference to Exhibit 4.(i) to Registrant's Annual Report on Form 10-K for the fiscal yearended December 31, 1993).** ****

4.2 Form of restricted stock grants under Registrant's 1994 Employees Stock Plan (incorporatedby reference to Exhibit 4.(ii) to Registrant's Annual Report on Form 10-K for the fiscal yearended December 31, 1994).** ****

4.3 Forms of performance-based stock options granted under Registrant's 1994 Employees StockPlan (incorporated by reference to Exhibit 4(iii) to Registrant's Annual Report on Form 10-Kfor the fiscal year ended January 3, 1998).** ****

4.4 Forms of performance-based restricted stock grants under Registrant's 1994 Employees StockPlan (incorporated by reference to Exhibit 4(iv) to Registrant's Annual Report on Form 10-Kfor the fiscal year ended January 3, 1998).** ****

4.5 Forms of stock options granted under Registrant's 1994 Employees Stock Plan (incorporatedby reference to Exhibit 4(v) to Registrant's Annual Report on Form 10-K for the fiscal yearended January 2, 1999).** ****

4.6 Forms of stock options granted under Registrant's 2000 Employees Stock Plan (incorporatedby reference to Exhibit 4(vi) to Registrant's Annual Report on Form 10-K for the fiscal yearended December 29, 2001).** ****

4.7 Registrant hereby agrees to furnish to the Commission, upon request, with the instrumentsdefining the rights of holders of each issue of long-term debt of Registrant and itsconsolidated subsidiaries.

10.1 Tax Sharing Agreement dated May 14, 1993 between Registrant and its subsidiaries(incorporated by reference to Exhibit 10.6 to Amendment No. 3 to The Allstate Corporation'sRegistration Statement No. 33-59676).

10.2 Supplemental Tax Sharing Agreement dated January 27, 1995 between Registrant and TheAllstate Corporation (incorporated by reference to Exhibit 10(d) to The AllstateCorporation's Current Report on Form 8-K dated February 22, 1995).***

10.3 Acquisition Agreement and Agreement and Plan of Merger, dated as of May 12, 2002, byand among Registrant, Inlet Acquisition Corp. and Lands' End, Inc. (incorporated byreference to Exhibit (d)(1) to the Schedule TO filed by Registrant on May 17, 2002).**

10.4 Registrant's 1982 Employees Stock Plan (incorporated by reference to Exhibit 4(a)(1) toRegistration Statement No. 2-80037 of Registrant).****

E -E -

2

EXHIBIT INDEX


10.5 Registrant's 1986 Employees Stock Plan, amended as of May 12, 1994 (incorporated byreference to Exhibit 10.19 to The Allstate Corporation's Annual Report on Form 10-K forthe fiscal year ended December 31, 1994).*** ****

10.6 Registrant's 1990 Employees Stock Plan, amended as of May 12, 1994 (incorporated byreference to Exhibit 10.20 to The Allstate Corporation's Annual Report on Form 10-K forthe fiscal year ended December 31, 1994).*** ****

10.7 Registrant's 1994 Employees Stock Plan (incorporated by reference to Appendix A toRegistrant's Proxy Statement dated March 23, 1994).** ****

10.8 Registrant's 2000 Employees Stock Plan (incorporated by reference to Appendix A toRegistrant's Proxy Statement dated March 17, 2000).** ****

10.9 Registrant's Associate Stock Ownership Plan (incorporated by reference to Exhibit10.(iii)(21) to Registrant's Annual Report on Form 10-K for the fiscal year ended January3, 1998).** ****

*10.10 First Amendment to Registrant's Associate Stock Ownership Plan, effective as of January1, 2001.****

*10.11 Second Amendment to Registrant's Associate Stock Ownership Plan, changing the nameof the Plan to the "Associate Stock Purchase Plan," effective as of April 1, 2001.****

*10.12 Third Amendment to Registrant's Associate Stock Purchase Plan, effective as of June 29,2002.****

10.13 Registrant's 2001 Broad-Based Stock Option Plan (incorporated by reference to Exhibit 4to Registration Statement No. 333-72514 of Registrant).****

10.14 Registrant's Annual Incentive Compensation Plan, amended and restated as of January 1,1994 (incorporated by reference to Appendix B to Registrant's Proxy Statement datedMarch 23, 1994).** ****

10.15 Registrant's Long-Term Performance Incentive Program dated October 10, 2001 andoperative adopting resolution (incorporated by reference to Exhibit 10.(ii)(21) toRegistrant's Annual Report on Form 10-K for the fiscal year ended December 29,2001).** ****

10.16 Registrant's Conformed Amended and Restated Long-Term Performance IncentiveProgram ("LTPIP"), as conformed and restated through August 14, 2002 and ConformingAmendment to Registrant's 2000 Employee Stock Plan for purposes of the LTPIP(incorporated by reference to Exhibit 10(a) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 28, 2002).** ****

10.17 Description of Registrant's Supplemental Life Insurance Plan, amended as of December31, 1986 (incorporated by reference to the second and third full paragraphs on page 10 ofRegistrant's Proxy Statement dated March 26, 1987).** ****

10.18 Registrant's Supplemental Retirement Income Plan, as amended and restated effectiveMarch 25, 1997 (incorporated by reference to Exhibit 10.(ii)(11) to Registrant's AnnualReport on Form 10-K for the fiscal year ended January 1, 2000).** ****

10.19 Registrant's Supplemental Long-Term Disability Plan (incorporated by reference toExhibit 10(d) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter endedSeptember 30, 1995).** ****

E -

3

EXHIBIT INDEX


10.20 Registrant's Deferred Compensation Plan, as amended and restated to December 13, 2000(incorporated by reference to Exhibit 10. (ii)(15) to Registrant's Annual Report on Form10-K for the fiscal year ended December 30, 2000). ** ****

*10.21 Registrant's Supplemental 401(k) Savings Plan, as amended and restated as of January 1,2001.****

10.22 Registrant's Transferred Executives Pension Supplement (incorporated by reference toExhibit 10.(iii)(16) to Registrant's Annual Report on Form 10-K for the fiscal year endedDecember 31, 1988).** ****

10.23 Amendment to Registrant's Transferred Executives Pension Supplement adopted onMarch 13, 1996 (incorporated by reference to Exhibit 10.(iii)(14) to Registrant's AnnualReport on Form 10-K for the fiscal year ended December 30, 1995).** ****

10.24 Amendment to Registrant's Executive Retirement Plan Arrangements, effective as ofMarch 24, 1997 (incorporated by reference to Exhibit 10.2 to Registrant's QuarterlyReport on Form 10-Q for the fiscal quarter ended June 28, 1997).** ****

10.25 Registrant's Non-Employee Directors Retirement Plan, as amended and restated to March13, 1996 (incorporated by reference to Exhibit 10.(iii)(8) to Registrant's Annual Reporton Form 10-K for the fiscal year ended December 30, 1995).** ****

10.26 Description of Registrant's Non-Employee Director Life Insurance Plan (incorporated byreference to the first paragraph on page 10 of Registrant's Proxy Statement dated March26, 1998).** ****

10.27 Registrant's Non-Employee Director Stock Plan (incorporated by reference to AppendixB of Registrant's Proxy Statement dated March 20, 1996).** ****

10.28 Registrant's 2002 Non-Employee Director Stock Plan (incorporated by reference toAppendix B to Registrant's Proxy Statement dated March 27, 2002).** ****

10.29 Letter from Registrant to Anastasia D. Kelly dated December 14, 1998 relating toemployment (incorporated by reference to Exhibit 10 to Registrant's Quarterly Report onForm 10-Q for the fiscal quarter ended April 3, 1999).** ****

10.30 Term Sheet from Registrant to Greg A. Lee dated December 8, 2000 relating toemployment (incorporated by reference to Exhibit 10 to Registrant's Quarterly Report onForm 10-Q for the fiscal quarter ended March 31, 2001).** ****

10.31 Letter from Registrant to Paul J. Liska executed October 1, 2001 relating to employment(incorporated by reference to Exhibit 10.(ii)(24) to Registrant's Annual Report on Form10-K for the fiscal year ended December 29, 2001).** ****

10.32 Letter from Registrant to Kathryn Bufano dated November 26, 2001 relating toemployment (incorporated by reference to Exhibit 10 to Registrant's Quarterly Report onForm 10-Q for the fiscal quarter ended March 30, 2002).** ****

10.33 Amended and Restated Agreement between Lands' End, Inc. and David F. Dyer datedMay 12, 2002 relating to employment (incorporated by reference to Exhibit (e)(4) toSchedule 14D-9 filed by Lands' End, Inc. on May 17, 2002).****

10.34 Letter Agreement between Registrant and David F. Dyer dated May 13, 2002 relating toemployment (incorporated by reference to Exhibit (d)(4) to Schedule TO filed byRegistrant on May 17, 2002).** ****

E -E -

4

EXHIBIT INDEX


*10.35 Letter from Registrant to Gerald F. Kelly relating to employment dated September 27,2002.****

*10.36 Letter from Registrant to Janine M. Bousquette relating to employment dated October 4,2002.****

*10.37 Letter from Registrant to Mark S. Cosby relating to employment dated November 13,2002.****

*10.38 Memorandum from Greg A. Lee to William G. Pagonis relating to employment datedApril 9, 2002.****

10.39 Form of Non-Compete/Change of Control Agreement for Executive Officers ofRegistrant (incorporated by reference to Exhibit 10 to Registrant's Quarterly Report onForm 10-Q for the fiscal quarter ended July 3, 1999).** ****

10.40 Form of Executive Non-Disclosure and Non-Solicitation of Employees Agreement andform of Executive Severance/Non-Compete Agreement for Executive Officers ofRegistrant (incorporated by reference to Exhibit 10.(ii)(26) to Registrant's Annual Reporton Form 10-K for the fiscal year ended December 29, 2001).** ****

10.41 $3,500,000,000 364-day Credit Agreement dated as of February 24, 2003 among SearsRoebuck Acceptance Corp. ("SRAC"), the banks, financial institutions and otherinstitutional lenders listed on the signature pages thereof, Bank One, NA, as syndicationagent, Barclays Bank PLC and Bank of America, N.A., as documentation agents,Salomon Smith Barney Inc. and Banc One Capital Markets, Inc. as joint lead arrangersand joint bookrunners, and Citibank, N.A., as agent for the Lenders (incorporated byreference to Exhibit 10(a) to SRAC's Current Report on Form 8-K dated February 24,2003).

10.42 Credit Arrangement Support Letter dated as of February 24, 2003 between Registrant andSears Roebuck Acceptance Corp. (incorporated by reference to Exhibit 10(b) to SRAC'sCurrent Report on Form 8-K dated February 24, 2003).

*12. Computation of ratio of income to fixed charges for Registrant and consolidatedsubsidiaries.

*21. Subsidiaries of Registrant.*23. Consent of Deloitte & Touche LLP.*24. Power of Attorney of certain officers and directors of Registrant.*99.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*99.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith ** SEC File No. 1-416 *** SEC File No. 1-11840 **** A management contract or compensatory plan or arrangement required to be filed as an exhibit to this

report pursuant to Item 15(c) of Form 10-K

E -

Company Information

Headquarters


3333 Beverly Road

Hoffman Estates, Ill. 60179

847.286.2500

Annual Meeting

The Annual Meeting of

Shareholders of Sears,

Roebuck and Co. will be

held at the company’s

headquarters at

3333 Beverly Road,

Hoffman Estates, Ill.

on May 8, 2003

at 10:00 a.m.

Sears Online

This annual report and

other financial information

can be found online at:

www.sears.com

Investor Information

Financial analysts and

investment professionals

should direct inquiries to:

Investor Relations

847.286.7385.

Sears Direct Purchase

Stock Plan Information

Prospective shareholders,

and shareholders whose

shares are held by a broker

or bank, should call

1.888.SEARS88

(1.888.732.7788)

or visit sears.com.

Customer Relations

1.800.549.4505

Financial/Shareholder

Information

You may call Sears toll-free at

1.800.SEARS80

(1.800.732.7780)

or visit sears.com

or write our registrar:


c/o EquiServe Trust

Company, N.A.

P.O. Box 43069

Providence, RI 02940-3069

for any of the following:

˜ Most recent stock price

information

˜ Copies of the company’s

financial reports

˜ Transfer agent/shareholder

records

˜ Individual stock records

˜ Investment plan accounts

˜ Dividend checks

˜ Stock certificates

EquiServe web site:

www.equiserve.com

E-mail address:

[email protected]

TDD for hearing impaired:

1.800.952.9245

Please use the following address

for items sent by courier:

EquiServe Trust Company, N.A.

150 Royall Street

Canton, MA 02021

For items delivered in person:

STARS, Inc.

100 William Street, Galleria

New York, NY 10038

The following trademarks and

service marks appearing in the 2002

annual report are the property of

Sears, Roebuck and Co.:

A&E Factory ServiceTM,

Apostrophe®, Canyon River Blues®,

CovingtonTM, Craftsman®, DieHard®,

Kenmore®, Lands’ End®, NTB®,

OSH Orchard Supply Hardware®,

Satisfaction Guaranteed or Your

Money BackSM, Sears®, Sears

American Dream CampaignSM,

Sears: Where Else?SM, TKS Basics®,

The Great Indoors®, Wish Book®

© 2003 Sears, Roebuck and Co.

Printed on recycled paper


re: FreshSears, Roebuck and Co. 3333 Beverly Road Hoffman Estates, Illinois 60179 www.sears.com

Sears An

nual R

eport 2002